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A guide to income tax for the self-employed

3-minute read

A guide to income tax for the self-employed
Josh Hall

Josh Hall

23 December 2020

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Income tax is one of the key financial considerations for every self-employed person in the UK.

If you're self-employed, you'll have to pay income tax and keep on top of your Self Assessment filing deadlines.

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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 2019-20 tax year, the personal allowance was £12,500. The personal allowance remains the same for the 2020-21 tax year.

The basic income tax rate is 20 per cent, which applies to income within the basic rate threshold. Taking the personal allowance into account, for the 2019-20 tax year, this was £12,501 to £50,000. For the 2020-21 tax year, this will be the same.

The higher rate is 40 per cent, and for the 2019-20 tax year this applied on earnings between £50,001 and £150,000. This remains the same for the 2020-21 tax year.

For earnings above £150,000, the rate is 45 per cent for both the 2019-20 and 2020-21 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.

If you're struggling to pay your tax bill because of coronavirus, HMRC will allow you to pay it in instalments through their Time to Pay service. However, if you can pay your tax bill before 31 January, you should. HMRC will charge you interest for late payments, so it will end up costing you more in the long run.

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.

Read more about registering as self-employed, and read our comprehensive guide to Self Assessment for the self-employed.

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 daunting, 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 reason 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. If you haven't got one yet, it's a good idea to get this sorted as soon as possible.

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.

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.

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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