How much tax do you pay if you are self-employed?

Ash Baggott

Bored of working for someone else? You’ve decided to go it alone, and now you’re pursuing the self-employed life? Good for you. Whether you’re working from your beach office, your bedroom, or anywhere between,  it’s important to know how much tax you need to pay and how to pay it correctly.

In the UK, when you’re self-employed, you’re solely responsible for paying tax and National Insurance on your income. It’s imperative that you stay on top of all your records in order to work out exactly the amount you need to pay.

Before you can work out how much you need to pay, you need to work out whether you’re employed or self-employed. Most of the time it’s straightforward, but sometimes it can be a little more complex. For example, you might be employed in one job and self-employed at the same time in a different job.

To find some guidance you can refer to the HMRC website, which has a tool called the Employment Status Indicator. This tool will work out you employment status for you based on your answers. Note, this is just an indicator based on your answers, and not a definitive answer.

Register as self-employed

Before we begin to cover how much you need to pay in taxes, make sure you have let HMRC know that you want to become self-employed. You must do this before 5 October, of the financial year you decided to change your employment status. If you haven’t managed to do so yet, you can register here.

How much can you earn tax free?

If you’re self employed in the UK, you are entitled to the same tax free personal allowance as a person who is employed. For the 2019/20 tax year, the standard personal allowance is £12,500. This is how much you can earn before paying any income tax.

However, if you have two jobs and one is self-employed, you are only entitled to the personal allowance on one of those jobs. You usually have to declare which one is your main employment and the personal allowance is usually applied to the job that’s paying you the most.

How much Income tax should you pay?

When you are self-employed, you pay income tax on you profits, not on your total income. To work out your profits, deduct your business expenses from your total income, and you will be left with the sum of money you must pay tax on.

The amount of income tax you are required to pay on your profits is the same as if you were employed. Take a look at the table below to see what you’re required to pay.

Rate 2019/20
Personal allowance: 0% £0 to £12,000 – you will pay zero income tax on your profits
Basic Rate 20% £12,501 to £50,000 – you will pay 20% tax on your profits
High Rate 40% £50,001 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

How to pay tax when self-employed?

Each year you are required to submit a Self Assessment tax return for the previous tax year. For the 2018/19 tax year you will need to submit your tax return by 31 January 2020. You will need to declare your total income and expenses, once this has been submitted, you will be informed how much tax you owe. This must be paid by 31 January 2020 for the 2018/19 tax year. You can find out more by registering on the website.

Finally, the fees of a self-employed person can change year on year, so always keep up to date with any changes on the HMRC website. Also, make sure you have an easy to use, online invoicing and billing software to track your income and profits.

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