Self-Employed Tax: How It Works and What You Need to Know

Don’t let the worry of self-employed tax slow down your dreams of being your own boss. The tax side of things might seem intimidating, but it’s completely manageable once you break it down—and it’s definitely not worth giving up on your dreams of working for yourself.

In this guide, I’ll walk you through everything you need to know about self-employed tax, step by step, so you can go back to focusing on building your business and escaping your 9-5 instead of worrying about the tax man.

1. How Does Self-Employed Tax Work?

What it means to pay tax when you’re your own boss

If you’ve ever worked for someone you’ve probably received a payslip with all your deductions for income tax, national insurance and pension payments taken care of, before you get paid. 

Your employer works out how much you owe and then pays what you owe over to HMRC on your behalf. It’s simple and you don’t have to work anything out yourself.

When you become self-employed, it’s your responsibility to track how much money your making, declare it to HMRC and work out how much tax you owe on that income yourself following the rules of self-assessment.

2. What’s Self-Assessment?

The system created by HMRC to collect tax and national insurance

Self-assessment is the system created by HMRC that anyone who receives untaxed income to declare it to the government and pay any tax due.

As a self-employed individual, the money you get paid by your clients and customers has no tax deducted from it.

In the UK most types of income are taxable, although there are some exceptions such as premium bonds and lottery wins

Self-Assessment is how you report your income to HMRC and calculate the taxes you owe. It means:

• Registering with HMRC: If you’re self-employed, you must register for self assessment by 5 October after the tax year you started working for yourself
• Filing a Tax Return: You submit an annual self-assessment tax return, detailing your income and allowable expenses
• Paying Tax and National Insurance: Based on the taxable profits you enter on your tax return, you’ll pay income tax and national insurance.

3. What is a Tax Return?

A tax return is the form that you use to declare any untaxed income to HMRC. It contains different sections that need to be completed depending on the type of income you’ve received for example:

• Rental income
• Employment income
• Self-employment income

You only need to complete the sections relevant to you and once you’ve typed in your figures, HMRC will automatically calculate how much income tax and national insurance you owe from the numbers entered.

Tax returns need to be submitted online by 31 January each year – one tax return contains all your earnings for the previous tax year.

The tax year runs from 6 April to 5 April each year. So a tax return due by 31 January 2025 would contain details of your income from 6 April 2023 to 5 April 2024.

4. What Tax and National Insurance Does the Self-Employed Have to Pay?

How You’re Affected By Income tax and National Insurance 

From 6 April 2024, as a self-employed worker, you’ll pay income tax and class 4 national insurance on the profit* you make from your business.

*Profit means all your business income minus business expenses you can claim as a tax deduction.

5. Self-Employed Tax Rates 2024-25

Tax Bands and the Basics of Calculating Your Tax Bill

Income tax and class 4 national insurance are paid at different rates and thresholds. But the amount of each you’ll pay is based on your business profits.

The income tax and national insurance rates change every tax year with any changes to tax rates usually taking effect at the start of each new tax year, on 6 April.

Income Tax

Income tax starts at 20% on all your income (not just from self-employment) over £12,570 in England and Wales.

Here are the income tax bands for the 2024-25 (the rates differ in Scotland):

• 20% on profits between £12,570 and £50,270
• 40% on profits over £50,270 to £125,139*
• 45% on profits over £125,140

*Once your income exceeds £100,000 you begin to lose your personal allowance at £1 for every £2 earned. You pay 40% tax plus repaying your personal allowance until it disappears at £125,140.

Example:

You live in England and your taxable business profits are £40,000 for the tax year 2024-25. You have no other forms of income. You’ll pay income tax of £5,486.20 which is calculated as:

• 0% on the first £12,570
• 20% on the next £27,430

Example:

You live in England, earning £40,000 gross salary from your job and £20,000 from your side hustle. The amount of income tax you pay is based on your combined income of £60,000 so you’ll pay income tax of £11,432.60 which is calculated as:

• 0% on the first £12,570
• 20% on the next £37,700
• 40% on the remaining £9,730

Your combined earnings mean that you are now paying the higher rate tax of 40%.

Class 4 National Insurance

As a self-employed worker, you’ll pay class 4 national insurance on your taxable business profits, in addition to income tax. The class 4 NI rates for 2024/25 are 8% on taxable profits between £12,570 to £50,270 and 2% thereafter.

If you are employed in a job, you’ll also be paying class 1 national insurance through your payslip.

Example:

Your taxable business profits are £40,000 for the tax year 2024-25. You’ll pay class 4 national insurance of £2,194.40 which is calculated as:

• 0% on the first £12,570
• 8% on the remaining £27,430

6. What Can I Claim as Expenses?

Lowering your tax bill

When you’re self-employed the amount of tax and national insurance you’ll pay is based on your business profits. For tax purposes, this means:

Business profits = business income – allowable business expenses

So say your business income was £1,000 and your allowable expenses were £400, you’ll pay tax on your business profit of £600 (£1,000 – £400).

Claiming business expenses reduces your taxable profit, which means you pay less tax. 

Allowable expenses are costs that HMRC permits you to claim against your tax bill.  Common expenses include:

• Travel Expenses: Mileage, public transport, or parking fees
• Marketing and Advertising: Social media ads, website hosting, or business cards
• Tools and Equipment: Laptops, software, or machinery
• Professional Services: Accountant fees or legal advice

7. Self-Employed Tax Dates and Deadlines

The deadlines you need to know

Here’s a summary of the tax dates and deadlines for the self employed:

• 31 January: tax return filing deadline, tax bill due for payment along with first payment on account
• 5 April: tax year ends
• 31 July: second payment on account due for payment
• 5 October: deadline to register as self-employed
• 30 December: tax return filing deadline to pay self-employed tax through PAYE

8. Payments On Account

Advance tax payments to HMRC

Payments on account are two advance payments you make towards your next tax bill that need to be paid by 31 January and 31 July each year. The amount you’ll pay is 50% of your most recent tax bill if:

• The tax bill for your latest filed return is more than £1,000;
• You pay less than 80% of your total tax bill through your payslip if someone employs you.

Any advance payments you make are deducted from your actual tax bill which is calculated when you file your tax return.

Although the process is designed to help self-employed people stay on top of their tax bill, it means that if this is your first year of self-employment you could find yourself paying an extra 50% of your tax bill in January and then again in July.

9. How Do I Make Taxes Less Overwhelming?

tips for Staying stress-free

1. Set Aside Money: Save around 20-30% every time you get paid for taxes to avoid surprises in January and July
2. Track Your Expenses: Record expenses as they happen so you don’t miss out on tax savings
3. Hire an Accountant: A professional can help you navigate tricky tax rules, find savings and take away the headache of filling in your tax return
4. Use Accounting Software: Tools like Xero simplify tracking and invoicing but if you’re tax affairs are fairly simple you can use a bookkeeping spreadsheet
5. Stay Organised: Keep all receipts, invoices, and records in one place to make filing easier
6. Open a Business Bank Account: Even though this isn’t a legal requirement, it’s highly recommended for anyone who is self-employed. Keeping your personal and business finances separate makes it much easier to track income and expenses, manage your cash flow, and prepare for tax time in January

10. What If I Make a Mistake or Miss a Payment?

what to do if things go wrong with HMRC

Mistakes happen, and missing a tax deadline can feel stressful, but it’s not the end of the world. Here’s what you can do:

1. Contact HMRC Immediately: Let them know what’s happened. They’re often more understanding if you reach out early and explain the situation
2. Late Payment Penalties: Be aware that HMRC may charge penalties and interest on unpaid taxes. The sooner you settle the balance, the lower these charges will be
3. Time to Pay Arrangements: If you can’t pay the full amount straight away, HMRC offers Time to Pay arrangements, allowing you to spread the cost over monthly installments
4. Amend Your Tax Return: If you spot an error in your tax return after submitting it, you can usually amend it within 12 months of the filing deadline
5. Stay Calm and Organised: Keep detailed records and notes about your communications with HMRC. This helps you stay in control and ensures nothing is overlooked

11. Where Can I Get Help with My Taxes?

How to find the support

• Contact HMRC directly
• Use online resources like HMRC’s tax calculator
• Hire an accountant or tax advisor
• Join The Self-Employed Club for tips and support to manage your solo business

FAQs: Self-Employed Tax