Self-employed tax explained

You’ve made the decision to go self-employed and join the 4.26 million* self-employed people in the UK. Good on you. You’ve got the freedom to work how you want and with who you want.

But being self-employed can be tough too. It’s all on you. You need to bring the work in, deliver and manage everything. Plus, there’s self-employed tax to consider too. Let’s look at the important tax considerations you need to know.

Self-employed tax explained

When you’re employed, you pay income tax and make national insurance contributions. This is all handled for you by your employer. When you’re self-employed, you still pay both but it’s done in a slightly different way.

You pay tax once a year

This is a huge difference. When you’re employed your tax comes out of your monthly pay cheque and goes to HMRC every month. As a self-employed person, you need to submit a self-assessment tax return once a year. That means you need to save some of what you earn throughout the year to pay your tax.

Income tax is paid on your profits

When you’re self-employed, you pay income tax on your profits only. If you’re registered as a sole trader for example, your income is everything you make through your business. Your profit is your income minus your costs, and there are plenty of costs you can put through the business pre-tax. It pays to understand all of them. Employed people simply pay income tax on the income they make through their salary.

If you’re self-employed and run a limited company, you’ll likely pay yourself a small base salary and take dividends through the business. Not only do you need to submit a self-assessment tax return, but you’ll also need to provide HMRC with your annual accounts alongside a corporation tax return.

You pay both income tax and national insurance contributions

Your income tax is calculated as follows:

When it comes to national insurance self-employed tax, you don’t pay anything if your profits are less than £12,570. If they were more than this, for the current tax year you’ll pay:

• 6% on profits between £12,570 and £50,270
• 2% on profits over £50,270 

Ryan's expert insights and strategies for smart tax planning

When you're self-employed, it pays to get smart with your tax planning. You need to know exactly how much you need to pay and when and how you can reduce your tax bill. The following should help:

Know all your important dates

You have to file your self-assessment tax return before the 31st January for the previous tax year. So for the tax year that finished on 5th April 2024, you’ll pay your tax by 31st January 2025.

Anything after this point is subject to fines. This can be £100 for just a single day late and up to £900 for being three months late. Don’t miss this date.

Important dates & deadlines

File as early as you can

By filing your tax return early, you’ll know in advance how much tax you need to pay when the time comes. It always makes good financial sense.

Understand your deductions

Remember when we said that self-employed income tax is paid on profits rather than income? Well that means there’s a range of deductions you can make before you calculate your profits. This is a super helpful way to cut your tax bill.

These allowable expenses include, but aren’t limited to:

• Office costs: Stationery or phone bills
• Training courses related to your business
• Advertising and marketing

If you drive for work instead of just to work, you can also claim back on your mileage. Currently, the mileage allowance from HMRC is set at the following flat rates:

• Cars and goods vehicles first 10,000 miles: 45p
• Cars and goods vehicles over 10,000 miles: 25p
• Motorcycles: 24p

If you drove 8,000 miles for your business in the last tax year, you can claim back a total of £3,600 (8,000 x 45p). That’s a worthwhile tax deduction.

And if you work from home for more than 25 hours a month, you can also claim back the following:

• 25-50 hours per month: £10 per month
• 51-100 hours per month: £18 per month
• 101 and more: £26

Save throughout the year

It should never be a case of doing your tax return and calculating the tax owed then scrambling around trying to find the money or taking on extra jobs to pay for it. Or even worse, borrowing to pay off your tax.

You need to save throughout the year to make sure you’re ready for your tax payment. Doing accurate bookkeeping helps you to understand where your profit margin is, so you have a decent idea of your profits during the tax year.

If you’re going to be in the 20% bracket, set aside 20% of all your income each month. It makes sense to pop it into a separate bank account for safekeeping. By doing this, you’ll easily have enough when the time comes to pay your tax. And you’ll likely be left with something extra when you consider your pre-tax deductions.

Using professional services for tax planning

When you’re self-employed, you’re relying on yourself for everything. You need to market your business, deal with the day to day and keep on top of the finances.

But you can’t be an expert in everything. And with something so important as your tax, it makes sense to outsource this.

By working with an expert tax specialist, not only will they keep you updated on when you need to pay and how much, but they’ll also assist with reducing your tax as much as possible. They’ll keep you updated on deductions you might not have been aware of and what to do to be eligible for them. Plus, they’ll do all the heavy lifting when it comes to submitting your self-assessment tax return too.

Get in touch with us

Becoming self-employed is a huge milestone in your life. And yes, you’ll be relying on yourself to run most of your business. But you’re not alone. When it comes to tax, it pays to have help in your corner. Working with a specialist accountant means you’ll never miss a deadline, your tax calculations are done for you and you won’t miss out on any available deductions. Get in touch with us today to find out more.