Self-employed workers have to pay income tax and National Insurance contributions on their earnings. Here’s what you need to know about tax if you're self-employed
If you work for yourself as a sole trader or a freelancer then you are self-employed when it comes to paying the tax you owe. Depending on how much you earn, you may have to pay both income tax and National Insurance contributions. If you have just started working for yourself, the first step is to register as self-employed with HMRC.
How much income tax do self-employed workers pay?
Rates of income tax are the same for self-employed workers and employees but if you work for yourself, the way that you calculate and pay the tax you owe is different. While employees pay tax as they earn under the PAYE system, self-employed workers must complete a self assessment income tax return in January every year. Self-employed tax payments must be paid twice a year - on 31 January and 31 July.
Income tax is only paid if you earn over a certain amount; this threshold is called the personal tax allowance.
What is the personal tax allowance?
In the UK, you don't pay tax on earnings under the personal tax allowance.
- The personal tax allowance is £12,570 - and that threshold has now been fixed until 2025/26.
However, if you earn over £100,000, your income tax personal allowance goes down by £1 for every £2 earned above £100,000.
What are the UK income tax bands?
Tax payers (including the self-employed) pay income tax at specific tax rates on earnings within specific income bands. Income tax bands can change from one year to the next.
UK income tax rates and bands for 2023/24 are:
- 0% tax on income up to the tax threshold of £12,570
- 20% tax on earnings between £12,571 and £50,270
- 40% tax on earnings between £50,271 and £125,140
- 45% on earning over £125,141
How to pay less tax if you're self-employed
As a self-employed worker, you only pay tax on your profits - not on your total earnings. It means that you can deduct allowable business expenses from your income before you pay tax. These costs must be business-related.
What are allowable business expenses?
Allowable business expenses include:
- Office expenses such as phone and internet, software, stationery and postage;
- Stock and materials;
- Marketing costs;
- Costs associated with running a business from your home such as a share of utility bills;
- Business premises, including rent, building insurance and utility bills;
- Business travel costs including car insurance and fuel as well as train, plane and bus tickets and taxi costs. Business travel does not include costs associated with getting from home to work and back;
- Accountancy costs, bank fees, overdraft charges and legal bills;
- Business insurance.
The government publishes guidance on business expenses; it also offers simplified expenses schemes for self-employed workers if you work from home, run a vehicle for your business or live in your business premises.
What if self-employment is not your only income?
You have to pay tax on all kinds of income earned during the tax year. That includes any wages earned as an employee as well as any profits you make from self-employment. You also need to declare any income from pensions, rental income, trust income and interest from savings on your self assessment tax return.
How much National Insurance do self-employed workers have to pay?
Self-employed workers currently have to pay two types of National Insurance contributions (NICs) - Class 2 and Class 4 contributions.
Class 2 NICs are paid at a flat rate of £3.45 a week. However, this is only payable if you earn profits above the Class 2 threshold of £6,725 (for the tax year 2023/24). Class 2 NICs are being abolished from April 2024.
Class 4 NICs are payable on yearly profits over £9,569. Class 4 tax rates and thresholds for 2023/24 are:
- 9% on profits between £12,570 and £50,270 (8% from April 2024)
- 2% on profits over £50,270
Most sole traders pay Class 2 and Class 4 National Insurance contributions as part of their self assessment tax return.
Class 2 NICs will be abolished from April 2024. Class 4 NICs will be reduced by 1% at the same time.