Tax for the self-employed

This article explains what to expect when doing your self-assessment tax return and the tax rules you must follow.

What is self-employed tax?

Self-employed individuals are assessable to income tax on the profits they make during a tax year. They also need to consider whether they have a liability to National Insurance that has also become payable.

An individual calculates the liability for the year by submitting their Self-Assessment tax return to HM Revenue & Customs (HMRC). If required, you must submit a tax return every year to confirm your income, taxes owed, and when payment is due.  

Unlike employees, self-employed individuals do not pay tax when they receive money, they instead need to budget and plan for this. Understanding your employment status is key to confirming your budgeting needs and reporting obligations.

Employment status is not a choice it is instead a matter of fact. To determine your employment status you need to establish all the facts and terms of your engagement.

Some factors that determine whether an individual is classified as self-employed, or an employee include:

• Mutuality of obligation
• Wage paid to the worker (and not a third party)
• Personal service
• ControlDegree of integration into the organisation
• Provision of own equipment
• Basis of payment
• Financial risk
• Opportunity to profit
• Business organisation
• The number and length of engagements
• Name of the contract and position of the parties

This is by no means an exhaustive list, but these are the most important criteria to considering your employment status.

To assist in determining employment status, HMRC have created an online test known as Check Employment Status for Tax (CEST) for users. Our article ‘What is a sole trader’ will also provide you with useful guidance.

Understanding your employment status is key to knowing what your reporting obligations are. If you are self-employed you will need to make HMRC aware and register accordingly. Early awareness will give you the peace of mind that you know what is coming up. 

How do I calculate my self-employment tax?

To establish your tax liability, you will firstly need to calculate your taxable self-employment profit for the year. You calculate this by subtracting allowable business expenditure from your total trading income.

Trading income is the business receipts you receive during the period as a result of completing your self-employment trade. You incur allowable business expenditure when you have spent costs solely and exclusively for your trade.

When calculating the taxable profit for the period, an individual has two accounting methods they can utilise:

• Cash basis, or
• Accruals basis

Both have benefits, so think about your situation and the rules to decide which method to use.

The cash basis aims to simplify income tax for small unincorporated trades. When using cash basis, you calculate trading profit by subtracting money paid out from money received in a tax year. This calculation relies on the date of transaction.

The accruals basis considers income and expenses based on when the business receives or pays them.  

You can get more inisghts on calculating your self-employment profits by reading guidance from HMRC.

It is worth highlighting that capital allowances may provide relief for certain capital items incurred during the year, so relief will be dependent on which accounting method is used. 

Once you calculate your taxable profit for the period, you can calculate your liability. From an income tax perspective, the non-savings rates will apply on the profits you make. Please see the tables below for confirmation of the rates payable, or click the following links for each England, Wales, Northern Ireland and Scotland. For the previous income tax rates visit the HMRC website.

People can earn up to £12,570 before paying income tax, which is called the personal allowance. If your income is over £100,000, you might lose your personal allowance. The amount can change if you qualify for the marriage or blind persons' allowance.

The rate of income tax applicable will vary depending on whether you are classified as a Scottish taxpayer. You need to complete an assessment each year to ensure you are applying the correct income tax rates.

Self-employed tax calculator

To help calculate your liability use of our TaxAssist app, available from either the Android or Apple stores. This will give you useful resources to calculate your tax for the year and help you plan your budget. 

HMRC also has a useful tool to help you budget for and estimate your potential self-assessment tax bill. 

What is the UK tax rate for the self-employed?

Self-employed individuals are subject to income tax on the profits they make during a tax year.

Once you calculate the taxable profit, you must pay income tax at the current non-savings rates. The following rates from 6th April 2024, will apply:

For England, Wales and Northern Ireland: 

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,139	40%
Additional rate	over £125,140	45%

For Scotland:

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Starter rate	£12,571 to £14,876	19%
Basic rate	£14,877 to £26,561	20%
Intermediate rate	£26,562 to £43,662	21%
Higher rate	£43,663 to £75,000	42%
Advanced rate	£75,001 to £125,140	45%
Top rate	over £125,140	48%

The personal tax allowance will be frozen up to and including the 2027/28 tax year.

For National Insurance, the table below provides a breakdown of the rates for the current tax year (2024/25):

NIC applicable	Rate applicable for the 2024/25 tax year
Class 2	£3.45 per week
Class 4	6% for profits between £12,570 - £50,270 2% for profits exceeding £50,270

NIC rates for the previous years are included on the HMRC website. Further guidance on Class 2 and 4 NICs is payable can be found later in this article.

How do I pay tax as self-employed?

Self-employed individuals will pay their annual tax liability through self-assessment. You calculate the liability arising for the year when you submit your self-assessment tax return.

To submit your tax return, you must first register for self-assessment and NICs on the HMRC website. Registering will give you a Unique Taxpayer Reference (UTR) from HMRC, which you need to submit your information correctly.

Register for self-assessment before 5th October after your business' first tax year ends. For example, if you started your business during the tax year ended 5th April 2024, you will need to register for Self-Assessment by 5th October 2024.

HMRC says it takes 20 working days to issue this, so first-time tax return filers should keep that in mind. After getting your UTR number, you can send your tax return to HMRC on time.

The method of submission will alter your submission due date. If you you’re your tax return on paper with the necessary supplementary pages you need to send it to HMRC by midnight on October 31st. This deadline applies to the tax year that has just ended.

The deadline for submitting tax returns online midnight on 31st January after the end of the tax year. This applies to those using their Government Gateway account or commercial software. 

The forms you submit to HMRC will depend on your personal circumstances. It is important to read HMRC guidance when preparing your self-assessment tax return to ensure you have supplied the correct information. Of course, if you need assistance with completing this we will be more than happy to complete this on your behalf. 

Individuals running as a partnership must submit a separate registration for the partnership tax return to HMRC. This will also require you to register personally for self-assessment.

What National Insurance do I pay if I am self-employed?

Each year, self-employed individuals must consider their National Insurance position and make sure they pay the correct liability.

Class 2 National Insurance

From April 2024, for those with profits of £6,725 and above Class 2 NIC is treated as paid to protect your national insurance record. No payment is required. For those with profits below £6,725, voluntary payments can be made. The Class 2 rate for tax year 2024/25 is £3.45 a week.

Class 4 National Insurance

Your liability to Class 4 National Insurance will depend on the profits you make and where these fall in comparison to the lower profits limit and upper profits limit. Highlighted below are the rates for the necessary tax years.

An individual will be liable to Class 4 NICs if the profit arising for the period exceeds the lower profits limit. Profits arising above this amount will be subject to Class 4 NIC at 6%. Should your profit exceed the upper profit limit, the excess will be subject to NIC at 2%.

The following Class 4 NIC rates are applicable:

Rates and limits	2024/25 tax year	2023/24 tax year
Lower Profits Limit (LPL)	£12,570	£12,570
Upper Profits Limit (UPL)	£50,270	£50,270
Rate payable between LPL and UPL	6%	9%
Rate payable above UPL	2%	2%

Here are a couple of worked examples to illustrate how Class 2 and 4 NICs work: 

1. For the 2024/25 tax year, you anticipate making a taxable profit of £62,000. You started trading from 8th July 2024 until the end of the tax year and want to understand your liability to Class 2 and 4 NICs.

Class 2 liability: £0  

Class 4 liability: £2,496.52

(50,270 – 12,571 = 37,699 x 6% = 2,261.94)

(62,000 – 50,271 = 11,729 x 2% = 234.58)

2. During the 2024/25 tax year, you make a taxable profit of £5,500. What is your NIC liability for the year?

Class 2 liability: you have the option to make voluntary class 2 NIC contributions.

Class 4 NIC liability: £nil

The year will not incur a liability because the lower profits limit of £12,570 has not been exceeded. 

How can TaxAssist Accountants help me?

Get expert help at TaxAssist Accountants for tax planning and reporting obligations of self-employed individuals.

We can assist with self-assessment tax returns, bookkeeping, VAT returns, tax planning along with any independent financial services.

To find out more and book your free consultation, call 01380 829 888 or complete our online enquiry form.

Date published 13 Sep 2023 | Last updated 6 Aug 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.