Being self-employed in the UK comes with a mix of challenges and opportunities. On one hand, individuals gain invaluable flexibility and autonomy, setting their own hours, pursuing passions, and directly reaping the rewards of their efforts. However, they must also manage their own finances, including tax on self-employed income, and pension planning.
This article will help you get a firm grasp on your tax responsibilities and empower you to make informed business decisions. Effective financial planning will help you maximise allowable deductions, leading to sustainable business success.
Understanding Self-Employment
Self-employment means working for yourself rather than being employed by a company. If you run your own business, offer freelance services, or earn income outside of traditional employment, HMRC considers you self-employed.
Many people get confused by self employment tax vs income tax. Income tax is a general tax on all income, whilst ‘self-employment tax’ refers to the combined burden of income tax on your profits and your National Insurance contributions.
But what about those who also have a regular, full-time job, and are also earning from side hustles? How does taxation work in that case?
The simple answer is: you pay income tax on both your employment salary and your side hustle profits. If you are a sole trader, HMRC will combine your earnings from your employed job and side business to determine which income tax bracket your overall income falls into. Problems arise when your side hustle earnings push you into a higher tax bracket.
Current Income Tax Brackets for Self Employed (2024/25)
In the UK, it is necessary to understand that the same income tax rates apply to both employed and self-employed individuals. Your income tax liability will be determined by where your taxable profits fall within these brackets. If you are a freelancer, your income is also subject to the same income tax rates as other self-employed individuals.
| Tax Bands | Taxable Income | Tax Rate |
|---|---|---|
Personal Allowance |
Up to £12,570 |
0% |
Basic Rate |
£12,571 and £50,270 |
20% |
Higher Rate |
£50,271 and £125,140 |
40% |
Additional Rate |
Over £125,140 |
45% |
How Much Are Class 2 and Class 4 NICs in 2024/25?
For the 2024/2025 tax year, self-employed individuals with profits exceeding £12,570 per year are liable for Class 4 NICs. These are calculated at 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.
Class 2 NICs are no longer mandatory, but individuals with profits below the Small Profits Threshold (£6,725) can still choose to pay voluntarily to maintain their entitlement for certain state benefits like State Pension, Maternity Allowance, and Employment and Support Allowance (ESA).
| NICs | Taxable Income | Tax Rate |
|---|---|---|
Class 2 |
Profits between £12,570 – £50,270 |
6% |
Class 4 |
Profits above £50,270 |
2% |
Other Taxes Imposed on the Self Employed
Value Added Tax (VAT)
If your self-employed business generates more than £90,000 in annual turnover (as of 2024/25), you must register for VAT and file regular VAT returns. The standard VAT rate in the UK is 20%, with reduced rates for certain industries. If your turnover is below £150,000, you might qualify for the Flat Rate Scheme in which you pay a fixed percentage (20%) of your gross turnover to HMRC.
Dividend Tax
If you operate through a limited company and pay yourself via dividends rather than salary, you will be subject to dividend tax. The tax-free dividend allowance for 2024/25 is £500, and any amount above this is taxed at:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
Corporation Tax
Self-employed individuals who incorporate their businesses into a limited company must also consider corporation tax. For 2024/25, the corporation tax rate ranges from 19% to 25%, depending on your profits.
Business Rates (If Working from a Separate Premises)
If you run your business from a separate commercial property, you may need to pay business rates, similar to council tax for businesses. However, if you work from home, you usually will not have to pay business rates unless a portion of your home is dedicated exclusively to business use.
Allowable Expenses and Deductions for Sole Traders
As a self-employed individual, you are allowed certain legitimate expenses to reduce your taxable profits. These expenses must be “wholly and exclusively” for business purposes. Categories include:
- Office Costs: Stationery, postage, printing, and telephone/internet bills.
- Travel Expenses: Business-related travel, including mileage, train fares, and accommodation.
- Equipment and Software: Costs of computers, software subscriptions, and other tools essential for your business.
- Professional Fees: Accountant, solicitor, and other professional service fees.
- Marketing and Advertising: Website costs, online advertising, and promotional materials.
- Premises Costs: Rent, utilities, and insurance for business premises.
- Clothing Expenses: Only specialised work clothing, not everyday wear.
- Home Office Expenses: A portion of household bills if you work from home.
Pension and Gift Aid
Contributions to a personal pension scheme are eligible for tax relief. It is a powerful way to reduce your current tax liability whilst saving for retirement. These contributions are deducted before income tax is calculated.
Likewise, if you donate to a registered charity through Gift Aid, the charity can reclaim basic rate tax on your donation. If you are a higher-rate taxpayer, you can also claim the difference between the basic rate and higher rate tax on your donation through your Self Assessment tax return.
Thinking about disposing off your company or parts of it? Learn about an important entrepreneur’s relief that you might not know about: Entrepreneurs Relief 2024: What Is It and How Can You Qualify?
Self-employment Income Examples
1) Freelance Consultant
Suppose you have a freelance management consultancy that provides strategic advice. Income is generated from project-based fees, totaling £60,000 for the tax year. Allowable business expenses, including travel, software, and home office costs, amount to £15,000.
Taxable profit is calculated as: £60,000 (income) – £15,000 (expenses) = £45,000.
This £45,000 profit is then reported via Self Assessment and subject to Income Tax and National Insurance Contributions.
2) Independent Software Development
In your capacity as an independent software developer, you generated £80,000 in revenue. Business-related expenditures, encompassing hardware, software licensing, and online services, amounted to £20,000.
Consequently, your taxable profit is £60,000 (£80,000 – £20,000).
Obtaining a Rebate
A tax rebate occurs when you have paid more income tax or National Insurance than you actually owe. This can happen for various reasons, and understanding when you might be eligible is crucial.
Overpaid Tax Through PAYE
If your tax code was incorrect, or if you changed jobs mid-year, you might have overpaid tax through your employer’s PAYE system. This is especially common if you had periods of unemployment or reduced income.
Self Assessment Overpayments
If you have made payments on account for your Self Assessment tax return, and your actual tax liability is lower than anticipated, you will be due a rebate. This could be due to unexpected expenses or a decrease in income.
Claiming Allowable Expenses
If you have incurred allowable business expenses that you previously have not claimed, you can amend your tax return and potentially receive a rebate.
Pension Contributions and Gift Aid
If you have made significant pension contributions or Gift Aid donations, and you are a higher-rate taxpayer, you will be entitled to claim back additional tax relief.
Checking your HMRC online account is often the quickest way to see if you have a rebate due.
How to Register as Self-Employed
Registering yourself as self-employed is a straightforward process and it is primarily done online. First, you will need to create a Government Gateway account if you do not already have one.
Once registered, HMRC will provide you with a Unique Taxpayer Reference (UTR) number. This UTR is essential for filing your Self-Assessment tax returns. You must register by 5 October in your business’s second tax year, or penalties will be charged. Registering promptly allows you to manage your tax affairs effectively and ensures you receive important updates from HMRC.
Learn how to register in 5 minutes flat using our guide!
Frequently Asked Questions
The “self-employed income tax form” refers to the sections of the Self Assessment tax return relevant to self-employment. You will find the entire Self Assessment tax return, including the self-employment pages, on the GOV.UK website.
The Personal Allowance for the 2024/25 tax year is £12,570. It is important to remember that this personal allowance reduces when your adjusted net income exceeds £100,000.
Keep accurate records of all business-related expenditures, including receipts, invoices, and bank statements. Categorise expenses accurately (e.g., office supplies, travel, equipment). Then, total up all of your recoded eligible expenses. Hire our expert tax accountants to do this job for you!
You pay Income Tax and National Insurance through Self Assessment. Register by October 5th in your second tax year. File your return and pay by January 31st following the tax year’s end (April 5th).
The most tax-efficient method depends on your business structure. For sole traders, minimise taxable profit by claiming all allowable expenses. For limited companies, a tax-efficient strategy may involve a combination of salary and dividends, considering Income Tax, National Insurance, and Dividend Tax rates. Contact our expert accountants for the best advice.
Simplify Your Self-Employed Income Tax with Legend Financial
At Legend Financial, we understand that being your own boss is incredibly rewarding, but it also comes with its own set of challenges, especially when it comes to tax on self-employed income. We are here to take that weight off your shoulders. We believe in planning ahead, not just reacting to deadlines. We stay on top of all the latest tax changes, so you do not have to. We will help you organise your records, identify every possible deduction, and ensure you are always compliant.
Contact us now and streamline your tax returns!
One Response
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