A guide to self-employed tax rates: what to know about income tax

What are the self-employed tax rates and what do Self Assessment taxpayers need to know about income tax?

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

• Self Assessment and tax resource
• How to do a self-employed tax return
• When is the Self Assessment deadline for tax year 2020-2021?
• How to use HMRC Time to Pay if you can’t pay your Self Assessment tax bill
• What is business insurance?

What is income tax?

UK income tax is charged on income and earnings made by individuals in any given tax year.

For employees, income tax is generally deducted at source. This means it’s taken out of an employee’s salary before it’s paid to them. But self-employed people pay income tax differently – they’ll need to record their earnings and let HMRC know what they owe in an annual tax return.

They can also deduct expenses to pay less tax, which means the self-employed pay income tax on trading profits rather than total income.

What are the self-employed tax rates?

Self-employed tax rates are the same as tax rates for employees. Most people get a standard tax-free personal allowance – income tax rates, bands and thresholds apply to everybody, too.

Your income tax personal allowance changes if your adjusted net income (income before any personal allowances and less certain tax reliefs) is above £100,000. It goes down by £1 for every £2 above £100,000.

You don’t pay a single income tax rate on your trading profits. Instead, you pay the appropriate rate on your trading profits within each bracket.

For example, if your trading profits are £50,100 in 2020-21, you pay:

• no income tax on £12,500 of your trading profits
• 20 per cent on the next £37,500
• 40 per cent on £100

Income tax rates and bands 2020-21

Income tax rates and bands 2021-22

How to reduce income tax if you’re self-employed

As mentioned, you don’t pay income tax on total income. Instead, you can deduct a number of allowable business expenses to calculate your total trading profits. This means that it’s important to record and deduct all of your allowable expenses to pay the right amount in tax.

Generally, you can claim expenses that are wholly and exclusively for business purposes – for example, accounting, business insurance, a business phone, and so on.

You can read more about reducing income tax by claiming expenses in our guide to allowable expenses for the self-employed.

There’s also lots of HMRC guidance about business expenses and you should check whether there’s any information from trade bodies specific to your industry.

How is self-employed income tax calculated?

This is an example self-employed tax calculation for tax year 2020-21, if someone has:

• no income from employment through PAYE
• £58,000 in self-employed income
• £5,000 in business expenses

This tax calculation includes income tax and self-employed National Insurance:

• £7,500 (20 per cent) on self-employment income between £12,500 and £50,000
• £1,200 (40 per cent) on self-employment income between £50,000 and £53,000
• Class 2 National Insurance at £159
• Class 4 National Insurance at nine per cent on £40,500 – which is £3,645
• Class 4 National Insurance at two per cent on £3,000 – which is £60

This comes to a total income tax and National Insurance bill for 2020-21 of £12,564.

The self-employed person makes £40,436 after tax.

Keep in mind that your individual circumstances will be different – it’s best to speak to a tax professional if you’re not sure.

Filing an income tax return when you’re self-employed

You need to complete an annual Self Assessment tax return by 31 January each year (it’s earlier if you file on paper, but HMRC is gradually making their entire tax system digital). You’ll also need to pay any tax due by 31 January.

You register for Self Assessment when you first go self-employed. There are penalties for doing this late, so make sure that you register promptly.

You’ll receive a notice to file each year. 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. You’ll need a Government Gateway login if you haven't got one yet, so 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.

Read more about your Self Assessment tax return in our comprehensive guide.

How do you pay self-employed income tax?

Employees pay tax automatically through PAYE, but self-employed people need to pay after filing their Self Assessment tax return. This also applies to company directors. HMRC should calculate your tax bill for you.

If you're struggling to pay your tax bill, don’t put off speaking to HMRC. They might be able to work out a payment plan for you to pay your bill in instalments – this is called a Time to Pay arrangement.

But if you can pay your tax bill by 31 January, you should. HMRC will charge you interest on late payments, so a payment plan will end up costing you more in the long run.

You should also remember payment on account. Under this system, you pay 50 per cent of your last tax bill towards your next year’s liability. There's also a payment on account due in July. Payments on account can be a surprise in your first year, but it’s important that you budget for them.