Income tax is one of the key financial considerations for every self-employed person in the UK.
You’ll have to pay income tax, and you’ll need to keep on top of your Self Assessment filing deadlines. Read more in our guide to income tax for the self-employed.
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What is income tax?
Income tax in the UK is a tax levied on the income or profits made by individuals in any given tax year.
For employees, income tax is generally deducted at source – that is, it’s taken out of pay packets before salaries are paid to the worker. However, self-employed people pay income tax differently, and they may pay a different amount.
What is the self-employed income tax rate?
Every worker gets a personal allowance – an amount that is taken tax free. For the 2018-19 tax year, the personal allowance was £11,850. For the 2019-20 tax year, the personal allowance is £12,500.
The basic income tax rate is 20 per cent, applying to income in the basic rate threshold. Taking the personal allowance into account, for the 2018-19 tax year, this was £11,851 to £46,350. For the 2019-20 tax year, this is £12,501 to £50,000.
The higher rate is 40 per cent, and for the 2018-19 tax year this applied on earnings between £46,351 and £150,000. For the 2019-20 tax year, this is for earnings between £50,001 and £150,000.
For earnings above £150,000, the rate is 45 per cent for both the 2018-19 and 2019-20 tax years.
However, self-employed people can also offset some of their expenditure against tax. This means that they can reduce their taxable income by deducting certain expenses from it. Generally speaking, you can offset expenditure that is wholly and exclusively for business purposes – for example, accounting, a business phone, and so on.
There is extensive guidance on allowable expenses available from HMRC, and you should check the guidance for your industry. However, you can also find information in our guide to allowable expenses for the self-employed.
How do self-employed people pay income tax?
Rather than paying through PAYE, as employees do, self-employed people must file an annual Self Assessment tax return. This also applies to company directors.
You need to register for Self Assessment when you first go self-employed. There are penalties for doing this late, so you need to make sure that you register promptly. After that, you’ll be required to complete an annual Self Assessment tax return, normally by 31 January each year. You’ll also need to pay any tax due by that date.
You should also remember the payment on account. Under this system, you pay 50 per cent of your last tax bill towards your next year’s liability. This can be a surprise in the first year, but it’s important that you budget for it.
How to file an income tax return when you’re self-employed
Getting ready to file your first income tax return as a self-employed person? It can seem like a daunting prospect, but with a bit of preparation you should be well on your way.
You’ll receive a notice to file each year, and you can file your return at any point from then – there’s no necessity to leave it until the last minute. Most people file their Self Assessment tax return online. For this, you’ll need a Government Gateway login. Remember that this takes several days to arrive by post, so make sure you apply for one accordingly.
When you log in to file your return, you’ll need to answer a series of questions about the nature of your business, any other income you’ve received (including foreign income), and your expenses and income. You can choose to write expenses as a single figure, or if your accounts are more complicated, you can break them down.
A successful tax return relies on meticulous record-keeping throughout the tax year. You need to keep track of invoices and receipts, and make sure that they’re properly filed. Most self-employed people use bookkeeping and accounting software to help them do this. Find the right option for you in our comparison of the best accounting software for small businesses.
If you aren’t sure about income tax or filing your tax return, it’s a good idea to get help from a qualified professional.
Looking for self-employed insurance?
With Simply Business you can build a single self employed insurance policy combining the covers that are relevant to you. Whether it’s public liability insurance, professional indemnity or whatever else you need, we’ll run you a quick quote online, and let you decide if we’re a good fit.