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Tax and National Insurance when you’re self-employed

When you’re self-employed, you’re responsible for paying tax and National Insurance on your income. It’s important to stay on top of all your records to work out how much you need to pay.

Working out your employment status

To work out how much tax and National Insurance you should pay, first you need to work out whether you’re employed or self-employed.

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This is usually straightforward, but sometimes it’s a bit more complex. For example, you could be employed in one job and at the same time be registered as self-employed in a different job.

The HM Revenue & Customs (HMRC) website has a tool that works out your employment status for you based on your answers to a series of questions.

Be aware that this is only an indicator and won’t give you a definitive answer on your employment status.

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Registering as self-employed

As soon as you become self-employed, it’s important to tell HMRC.

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The very latest you can register with HMRC is by 5 October after the end of the tax year during which you became self-employed.

For example, if you started your business in June 2021, you would need to register with HMRC by 5 October 2022.

The tax year runs from 6 April one year to 5 April the next. If you register too late, you might need to pay a penalty.

To register with HMRC, go to the GOV.UK website

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How much can you earn tax-free if you’re self-employed?

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If you’re self-employed, you’re entitled to the same tax-free Personal Allowance as someone who’s employed.

For the 2021-22 tax year, the standard Personal Allowance is £12,570. Your personal allowance is how much you can earn before you start paying Income Tax.

If you earn over £100,000, the standard Personal Allowance of £12,570 is reduced by £1 for every £2 of income you earn over the £100,000 limit for the 2021-22 tax year.

However, if you have two jobs and one is self-employed, things are a little more complicated.

You only get one Personal Allowance, which is usually applied to what HMRC see as your main employment.

It’s usual to have your Personal Allowance is applied to the job paying you the most.

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The easiest way to find this out is to look at the tax code. Your main job should have the tax code 1250L for the 2021-22 tax year. Your secondary job will have the tax code BR, D0 or D1.

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Trading and Property Allowance

You can earn up to an extra £1,000 tax-free from what’s called the trading or property allowance.

If your income is less than £1,000, you don’t need to declare it.

If your income is more than £1,000, you’ll need to register with HMRC and fill in a Self Assessment Tax Return.

However, it’s important to remember that if you claim this allowance, you can’t deduct business expenses.

Are your expenses more than £1,000? Then, you’re generally better off not claiming the allowance and deducting your expenses on your Self Assessment tax return.

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Income tax when self-employed

When you’re self-employed, you pay income tax on your trading profits – not your total income.

To work out your trading profits, simply deduct your business expenses from your total income. This is the amount you’ll pay Income Tax on.

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The amount of income tax you pay on your trading profits is the same as if you were employed.

The table below shows the rates of Income Tax, depending on how much you earn.

Rate 2021-22 2022–23

Personal allowance: 0% 

£0 to £12,570 you will pay zero income tax on your profits 

£0 to £12,570 you will pay zero income tax on your profits 

Basic rate: 20%

£12,571-£50,270 you will pay 20% tax on your profits

£12,571 to £50,270 you will pay 20% tax on your profits 

Higher rate: 40%

£50,001-£150,000 you will pay 40% tax on your profits

£50,001-£150,000 you will pay 40% tax on your profits

Additional rate: 45% 

Over £150,000 you will pay 45% tax on your profits 

Over £150,000 you will pay 45% tax on your profits 

Remember, you don’t pay Income Tax at the same rate on all your trading profits. You only pay the rate of Income Tax on your trading profits in the bracket. For example, if you earn £55,000 a year the Income Tax you’ll pay for 2021-22 works out like this:

Trading profit Income Tax band Tax you pay

Up to £12,500

0%

No Income Tax on first £12,500.

Between £12,571 and £50,270

20%

20% Income Tax on your next £37,500 trading profits.

(£50,270–£12,570 = £37,700)

Between £50,001 and £150,000

40%

40% Income Tax  on the final £4,730 (£55,000-£50,270=£4,730)

Over £150,000

45%

No Income Tax paid at this rate.

Calculate your Income Tax and National Insurance contributions if you’re self-employed on the GOV.UK website

If you live in Wales, your Income Tax rates are now set by the Welsh Government. At the moment, these are the same as for England and Northern Ireland for the 2021/22 tax year.

If you live in Scotland, your Income Tax rates are set by the Scottish Government and are different.

If you live in Scotland, find out about the different Income Tax rates you’ll pay in our guide Scottish Income Tax and National Insurance.

National Insurance Contributions if you’re self-employed

National Insurance contributions pay for certain benefits, including the State Pension and Universal Credit.

Certain benefits are also based on the contributions you’ve made.

Do self-employed workers pay National Insurance?

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Yes. Most self-employed people pay Class 2 NICs if their profits are at least £6,515 during the 2021–22 tax year. Or £6,725 in the 2022-23 tax year.

If you’re over this limit, you’ll pay £3.05 a week, or £158.60 a year for 2021–22 (£3.15 a week or £163.80 a year for 2022-23).

Paying Class 2 contributions is voluntary for self-employed people with profits below the Small Profits Threshold. Paying Class 2 National Insurance contributions, even if your profits are lower, can still help you build contributory entitlements to benefits and the State Pension.

If your profits are £9,569 or more in 2021-22 (£9,880 in 2022–23), you’ll also pay Class 4 National Insurance contributions.

If you’re over this threshold, you’ll pay 9% on profits between £9,569 and £50,270 in the 2021–22 tax year (£9,880 and £50,270 in 2022–23), and 2% on anything above this.

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How to pay tax and National Insurance when self-employed

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Corporation Tax

Are you running a private limited company (Ltd) or limited liability partnership (LLP)? Then you’ll also need to pay Corporation Tax on your business profits.

You might also have to submit a Self Assessment tax return for any money you earn through the company.

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