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 2020, you would need to register with HMRC by 5 October 2021.

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 2020-21 tax year, the standard Personal Allowance is £12,500. 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 £12,500 is reduced by £1 for every £2 of income you earn over the £100,000 limit for the 2020-21 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 2020-21 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
2020-21
2021–22

Personal allowance: 0% 

£0 to £12,500 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%

£12,501-£50,000 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

£50,271 to £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 £52,000 a year the Income Tax you’ll pay 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 £12,501 and £50,000

20%

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

(£50,000–£12,500 = £37,700)

Between £50,001 and £150,000

40%

40% on the final £2,000 of trading profits.(£52,000–£50,000 = £2,000)

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 2020/21 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?

Yes. Most self-employed people pay Class 2 NICs if their profits are at least £6,515 during the 2021–22 tax year. Or £6,475 in the 2020-21 tax year.

If you’re over this limit, you’ll pay £3.05 a week, or £158.60 a year for both the 2021–22 and 2020–21 tax years.

If your profits are £9,568 or more in 2021-22 (£9,500 in 2020–21), you’ll also pay Class 4 National Insurance contributions.

If you’re over this threshold, you’ll pay 9% on profits between £9,568 and £50,270 in the 2021–22 tax year (£9,500 and £50,000 in 2020–21), and 2% on anything above this.

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How to pay tax and National Insurance when self-employed

Each year, you’ll probably have to submit a Self Assessment tax return for the previous tax year.

For the 2020–21 tax year, you’ll need to submit your tax return by:

  • 31 October 2021 for paper tax returns
  • 31 January 2022 for online tax returns.

You will, among other things, need to declare your total income and expenses.

When you’ve completed and submitted the return, you’ll be told how much tax and National Insurance you owe. You need to pay this by 31 January 2022 for the 2020–21 tax year.

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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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Whatever your circumstances or plans, move forward with MoneyHelper.

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