Paying tax when self-employed can be complicated, especially those who have just started working for themselves. We took a look at what is involved.
How Much Earnings Are Tax-Free?
The same tax-free Personal Allowance is available to self-employed people as it is to employees.
The regular Personal Allowance for tax year 2021–2022 is £12,570. You can earn up to your personal allowance before you must begin paying income tax.
For the tax year 2021–2022, if you earn more than £100,000, the regular Personal Allowance of £12,570 is decreased by £1 for every £2 of additional income.
However, things become a little trickier if you work two jobs, one of which is self-employment.
You only get one tax allowance. The easiest way to find this out is to look at the tax code. Your main job should have the tax code 1250L for the 2021-22 tax year. Your secondary job will have the tax code BR, D0 or D1.
Paying Tax When Self-Employed – Trading & Property
What is referred to as the trading or property allowance allows you to earn up to an additional £1,000 tax-free.
You don’t have to disclose your income if it is less than £1,000.
You must register with HMRC and complete a Self Assessment Tax Return if your income exceeds £1,000.
It’s crucial to keep in mind that if you use this limit, you cannot write off any related company expenses.
Are your expenses more than £1,000? In that case, it is usually preferable to forego the allowance and instead claim your expenses as a deduction on your Self Assessment tax return.
Paying Tax When Self-Employed – Tax On Profits
When you work for yourself, you pay income tax on your trading profits rather than your overall earnings.
Simply deduct your business expenses from your overall income to calculate your trading profits. You will pay income tax on this amount. The amount of income tax you pay on your trading profits is the same as if you were employed. There is a 20% tax rate on earnings from £12,570 to £50,270. Above that the rate rises to 40%, and to 50% for over £150,000 earnings.
Paying Tax When Self- Employed – Calculators
Calculate your Income Tax and National Insurance contributions if you’re self-employed on the GOV.UK website
If you live in Wales, your Income Tax rates are now set by the Welsh Government. At the moment, these are the same as for England and Northern Ireland for the 2021/22 tax year.
If you live in Scotland, your Income Tax rates are set by the Scottish Government and are different.
National Insurance Contributions
If their profits reach at least £6,515 in the tax year 2021–2022, the majority of self-employed people must pay Class 2 NICs. for the 2022–23 tax year, or £6,725
If you exceed this cap, you will pay £3.05 per week or £158.60 annually in 2021–2022 (or £3.15 per week or £163.80 annually in 20223–2022).
For self-employed people with profits below the Small Profits Threshold, paying Class 2 contributions is optional. Even if your profits are lower, paying Class 2 National Insurance contributions might still help you accrue contributory entitlements to benefits and the State Pension.
The majority of self-employed people must pay Class 2 NICs for the 2022-2023 tax year if their profits total at least £6,515 in the tax year 2021-2022.
You will be charged £3.05 per week or £158.60 annually in 2021-2022 (or £3.15 per week or £163.80 annually in 20223-2022) if you go over this cap.
It’s not required for self-employed individuals with profits below the Small Profits Threshold to pay Class 2 contributions. Paying Class 2 National Insurance contributions may nevertheless enable you to collect contributory entitlements to benefits and the State Pension, even if your profits are lower.
Corporation Tax
Are you running a private limited company (Ltd) or limited liability partnership (LLP)? Then you’ll also need to pay Corporation Tax on your business profits.
You might also have to submit a Self Assessment tax return for any money you earn through the company.
