How much tax will I pay in the UK if I am self-employed?
Being self-employed may mean more flexibility with your schedule and workload. However, it can also make recording and paying tax more complicated.
This article will take you through UK income tax rates, specifically, self-employed taxes and tax deductions, so that you don’t need to ‘guesstimate’ anymore.
While you may be self-employed, you may not always have to pay the same self-employed tax. HMRC has different taxes for different folks.
Do I qualify as self-employed with HMRC?
If you are working for yourself, HMRC will consider you self-employed and classify you as a sole trader, only if you regularly:
- Make and/or sell goods to make a profit
- Earn commission from selling goods to others
- Receive payment for a service you provide
If you run a limited company, you are not self-employed for tax purposes. As a director, you are considered an employee.
Not quite sure how to register as self employed? Check out our article, “Register as self employed in the UK: the ultimate guide“.
As a sole trader, what self-employed tax am I liable for?
You pay self-employed taxes on business revenues. However, as there are costs to running a business, HMRC allows you to take off expenses from your gross income. These deductions called ‘allowable expenses’ cover:
- Office, property and equipment
- Car, van, and travel expenses
- Clothing expenses
- Staff expenses
- Reselling goods
- Legal and financial costs
- Marketing, entertainment, and subscriptions
- Training courses
But there is fine print to these tax deductions that can be claimed by self-employed people.
For example, you can claim meals on overnight business trips but not on day business trips. You can’t claim travel between home and work. And you cannot claim expenses off private purchases. But, if you work from home, you can proportionately offset your household bills, which include electricity, water, internet, mortgage interest, etc.
For a self-employed sole trader, the lines between personal and business expenses can be blurred, and it can be tricky to work out the exact amounts you should be claiming expenses on. Thankfully, you can use HMRC‘s simplified expenses to arrive at these self-employed tax deductions.
Want to secure a self employed grant for your business but not sure how? We have created an article answering that question and more!
Self-employed tax returns: keeping track of your income
As a self-employed individual, one of the most important things you will need to do is file your self-employed tax return.
But filing a correct tax return requires you to keep accurate records of your income and expenses throughout the year. In order to do this, the first step will be to select your mode of accounting:
- Accrual basis: You record income and expenses by the bill date, even if you did not receive the money until the next tax year.
- Cash basis: You record income and expenses by the date of receipt or payment. This option is available up to an income of £150,000. The significant advantage is you pay self-employed income tax only on money received in your accounting period.
While filing your self-employed tax return, records do not have to be submitted. However, you must maintain records of everything including your personal income, grants, and claims, in case HMRC ever request to verify them. You should also make sure you keep proof of stock receipts, bank statements, and chequebook stubs.
Need a guide on self employed tax return? We have got just the thing for you!
Self-employment tax allowances
Deducting business expenses is not the only way to reduce your self-employment taxes; you can claim certain self-employed allowances as well.
Personal Allowance
Just like employed individuals, sole traders are also automatically given a Personal Allowance of £12,570 which is not taxable.
Trading Allowance
You may choose to claim Trading Allowance of up to £1,000 on your gross trading income. This means you won’t need to pay any self-employment tax up to a net profit of £1,000. Sometimes called the hobby allowance – this is particularly useful if you have a casual income (like babysitting) and low expenses. However, if you claim Trading Allowance you won’t be able to deduct any business expenses or claim any other allowances, so you should only do so if your expenses are lower than your income.
Capital Gains Allowance
The Capital Gains Allowance permits you to deduct from your profits some or all of the value of capital assets used in business, such as equipment, machinery, and vehicles.
Filing your self-employed tax return
If you are an employee, your tax is automatically deducted and you do not generally need to complete a tax return. On the other hand, if you are self-employed, you have to file your self-assessment tax return and pay your self-employment taxes by the deadlines, or you may end up paying a fine.
Deadlines for the current tax year
Registration | 5th October 2023 |
Paper Tax Returns | Midnight, 31st October 2023 |
Online Tax Returns | Midnight, 31st January 2024 |
Payment on Account | Midnight, 31st January 2024 |
Payment on Account | Midnight, 31st July 2024 |
It may come as a surprise, but, as a sole trader, you may be expected to make advance payments for next year’s income tax (payment on account), which means you could end up paying extra self-employment taxes (of course, you will get a refund). If you need help wrapping your head around this, Sleek is here to help.
What self-employed taxes does a sole trader pay?
There are three self-employed taxes that you as a sole trader will pay:
1. Income Tax:
You and your business are one legal entity. So, to arrive at the net taxable income that you owe, add your other income to your net business profits, and deduct the standard Personal Allowance of £12,570.
You won’t pay income tax at the same rate on your entire taxable income. The UK has three tax bands for the current tax year. As a self-employed ‘sole trader’, you pay:
- 0% for total taxable income up to £12,571
- 20% for total taxable income between £12,571 to £50,270
- 40% for total taxable income between £50,271 to £125,140
- 45% for total taxable income above £125,140
2. National Insurance Contributions (NIC)
National Insurance Contributions pay for certain public services available to you, such as your State Pension and Maternity Allowance.
If your profits are above £12,570 for the tax year 2023 to 2024, you will pay under 2 categories:
- Class 2: £3.45 a week
- Class 4: 9% on profits between £12,570 and £50,270; 2% on profits over £50,270
3. VAT
When your yearly revenue reaches £85,000, you will also need to register and pay for VAT. However, do remember that you can include VAT is the cost of your products or services and the standard VAT rate for 2023-24 is 20%.
If you’re having trouble calculating your taxes, you can use HMRC’s self-employed-ready reckoner to budget for your tax bill.
Will I pay self-employed taxes if I run my own private limited company?
No, if you run your own limited company, you will technically be an employee of your company and will pay regular taxes. In addition, you will have to pay taxes applicable to limited companies. To qualify as a limited company, your entity needs to:
- Be legally separate from the people who run it
- Have separate finances
- Have shares and shareholders
What is a limited company taxed on? Does it get self-employment deductions?
A limited company is taxed on its net business profits. And no, it does not get self-employment deductions. Here is what a limited company can deduct:
- Expenses: You can fully deduct allowable business costs from your business profits but not from your personal income. Remember that you and your company are separate. Your tax deductions can include office, travel, staff, and marketing financial costs, as well as costs of your business premises. And, it may come as a surprise, but HMRC does not allow expenses towards entertaining clients.
- Benefits: Personal expenses to your directors or employees are treated as benefits and are not usually tax-deductible, but you need to report such expenses to HMRC nonetheless. This includes company cars, health insurance, travel and entertainment expenses.
- Capital Allowances: If you buy assets for use in your business, such as equipment machinery, business vehicles, and even certain fixtures and fittings, you can deduct the total cost from your profits. The annual investment allowance (AIA) currently provides a 100% deduction on qualifying capital expenditure up to a limit of £1 million.
Limited companies: what are tax compliance checks?
HMRC may periodically drop in for a compliance check. In order to meet their requirements, you need to keep accurate records of all your company transactions, such as taxes you’ve paid, accounts and tax calculations, tax returns and PAYE records.
You will also need to keep records of any other information, including details of board meeting resolutions, share transactions, loans, and mortgages. Hiring a professional tax accountant helps ensure that your papers are in order.
Limited companies: deadlines to meet
To avoid any unnecessary hassle from HMRC, you should ensure you file your Company Tax Return and pay your taxes on time, even if you have no corporation tax to pay.
Deadlines for the current tax year
- Filing your Company Tax Return: 12 months after the end your accounting period
- Paying Corporation Tax: 9 months and one day after the end your accounting period
When you file your Company Tax Return with HMRC, you will need to simultaneously file your accounts with Companies House for the same accounting period. The online service automatically converts your accounts to the required format. In fact, you may only use the paper form (CT600) if you’re unable to file online or you have a reasonable excuse.
What UK taxes do I need to pay for my limited company?
You need to pay both types of taxes- in your personal capacity and as a company director.
For yourself
You will have to pay both Income Tax and National Insurance Contributions through your paycheck. File a self-assessment tax return if you have dividend income.
For your company
Corporation Tax
Unlike sole traders, a limited company does not pay self-employed Income tax. It pays corporation tax on net business profits and the sale of any assets.
The Corporation tax for years 2023-24 are:
- More than £250,000 profit – the ‘main rate’ of 25%
- Up to £50,000 profit – the ‘small profits rate of 19%
- Profits between £50,000 – £250,0000 – the main rate of 25% but you may be entitled to ‘Marginal Relief’
Value-added tax (VAT)
You need to pay VAT only annually when your turnover crosses £85K. The current VAT rate chargeable to customers is 20%. However, you can deduct VAT payments made by your suppliers.
Employers’ National Insurance Contributions
Even if you are your company’s only employee, as an employer you’ll still need to pay National Insurance towards Class 1A and 1B. The rate for years 23-2 is 13.88%. And, National Insurance Contribution is to be paid on expenses and employee benefits.
Conclusion
You’re responsible for paying all your taxes. You can only do this effectively only if you stay on top of your records, deadlines, and rules around benefits and deductions. Keeping on top of it all will also help you avoid either overpaying taxes or missing deadlines and being charged penalties.
As your business grows, you may wish to consider hiring a trusted accountant or tax advisor to help you navigate the complex world of self-employed and limited company taxes.
At Sleek, we can provide you and your company with efficient and transparent accounting and tax services. With outsourced accounting solutions like Sleek, you can focus entirely on your business. Get in touch with us today if you need any assistance.
FAQs
Partnership companies are not taxable entities, you will need to file a self-assessment tax return. Your share of profits is subject to the same taxes as self-employed individuals in the UK.
Yes, you have to make two payments on account every year. Each payment is half your previous year’s tax bill and, if there is still any tax due, you will need to make a ‘balancing payment’ by midnight on 31 January next year.
Marginal Relief is a gradual reduction in the rate of Corporation Tax that limited companies can claim if their net taxable income is between £50,000 and £250,000. You can calculate Marginal Relief for Corporation Tax to check how much Marginal Relief you may be able to claim
