For self-employed business owners in the UK, understanding and calculating income tax correctly is essential. Unlike employees, self-employed individuals need to handle their own tax. In this guide, we’ll help you through the steps for figuring out income tax if you’re self-employed in the UK.
What is Income Tax?
Income Tax is the money you owe the government, and depends on your earnings, whether you run your own business or work for someone else. You have to pay this tax if you are self-employed. You will also have to pay two National Insurance Contributions (NICs). But we will get to that! How much you pay depends on your earnings which you calculate after deducting business costs and any eligible tax benefits.
Registering as Self-Employed
Before calculating your income tax, register as self-employed with HMRC. You can do this online via the government’s official website or by contacting the HMRC. Once registered, you’ll receive a Unique Taxpayer Reference (UTR) number. You’ll need it for all your tax-related activities, so keep it safe!
Keep Accurate Records
Keeping accurate records is the foundation of a successful tax calculation process. You should keep records of your incoming and outgoing finances. This makes the tax calculation smoother and helps you claim deductions and credits. If you haven’t started this yet, check out our blog post:
How much Income Tax do Self-Employed people pay?
Income tax rates are the same for the self-employed and employees. However, the way you calculate and pay taxes is different. Employees have their taxes and NI deducted from their pay through the PAYE system, which simplifies tax management for them.
Self-employed individuals must submit their Self Assessment Tax Return yearly. It should be by January 31st each year, covering the previous tax year ending on April 5th. Tax payments are due twice a year, on January 31st and July 31st. We call these “Payments on Account.” Not everyone must make these upfront instalment payments.
What are the Tax Rates?
The UK uses a tiered system for income tax rates. Understanding these rates and bands is essential for accurate tax calculations. You only pay income tax if you earn over a certain amount, called the personal tax allowance.
Personal Allowance: Up to £12,570 (0% tax)
Basic Rate: £12,571 to £50,270 (20% tax)
Higher Rate: £50,271 to £125,140 (40% tax)
Additional Rate: Over £125,140 (45% tax)
When filling out your tax return online, HMRC will calculate your tax as you go. Tax and NI thresholds change each year. So ensure you check the current rates, as these figures may be from past years’ data. You can download our Tax Tables for quick access to these rates and more.
National Insurance Contributions
Class 2 and Class 4 NICs rely on your taxable self-employed profits. You calculate these profits by subtracting allowable business expenses from your total income. Here’s how they work:
Class 2:
If your profits exceed the personal allowance of £12,570, you’ll need to pay a fixed weekly amount of £3.45. The actual amount you owe depends on how many weeks you were self-employed during the tax year. A “week” runs from Sunday to Saturday. If a contribution week spans two tax years, it falls into the earlier year.
For Example, if you started self-employment on January 12th, 2023, you’d pay for 12 weeks of Class 2 NICs for the 2022/23 tax year. This calculation is 12 weeks x £3.45 = £31.40.
Class 2 and Class 4 NICs rely on your taxable self-employed profits. You calculate these profits by subtracting allowable business expenses from your total income. Here’s how they work:
Class 2:
If your profits exceed the personal allowance of £12,570, you’ll need to pay a fixed weekly amount of £3.45. The actual amount you owe depends on how many weeks you were self-employed during the tax year. A “week” runs from Sunday to Saturday. If a contribution week spans two tax years, it falls into the earlier year. E.G., if you started self-employment on January 12th, 2023, you’d pay for 12 weeks of Class 2 NICs for the 2022/23 tax year. This calculation is 12 weeks x £3.45 = £31.40.
TAX-FREE BUSINESS EXPENSES
You can also refer to tax-free business expenses as deductions. You can subtract these costs from your business income before calculating your taxes. These expenses relate to operating your business and are essential. Keep track of your business expenses and ensure they’re relevant to your business. Consider using a receipt capture app to collect receipts and invoices as you go. It’s a good idea to seek advice from a tax expert or refer to HMRC guidelines for accuracy.
Here are some common examples of deductions:
- Office Costs: Expenses related to your office space. Including rent, utility bills, software, stationery, and postage.
- Travel Expenses: Costs related to business travel, including fuel, public transport, and accommodation. Commuting costs do not count.
- Vehicle Costs: Expenses linked with using a vehicle for your business. Such as fuel, insurance, maintenance, and vehicle tax.
- Cost of Goods Sold: Expenses tied to buying or making your products, including raw materials, inventory, and manufacturing costs.
- Marketing and Advertising: Money spent on advertising and promoting your business.
- Business Insurance: Premiums for business insurance, including liability or professional indemnity insurance.
- Bank and Credit Card Charges: Fees and interest linked to managing your business finances.
- Professional Fees: Payments to professional services related to your business. Including accounting and legal advice.
- Subcontractor Costs: Payments to subcontractors on behalf of your business.
- Repairs and Maintenance: Costs of taking care and fixing equipment, property, or assets used in your business.
- Equipment and Assets: Costs of buying or upgrading equipment, machinery, or other assets for your business.
- Home Office Expenses: If you work from home, you can get money back for the part of your home used for business.
Check out our YouTube video 10+ Things You Can Claim for your Business (Tax Deductible) to learn more…
Top Tips for a Stress-Free Process
If you feel overwhelmed, here are some practical tips to simplify the process. And remember, we’re here to help whenever you need it!
Start Early, Stay Organised: It’s all about forming good habits. Keep detailed records of your income and expenses throughout the year. Do this right from the beginning of your business.
File Sooner, Know Sooner: Complete your tax return early and you will discover your tax liability sooner. You can save your progress and return to it when you have all the necessary details.
Beat the Deadline: Don’t let procrastination be your enemy. Submit your tax return before the deadline to avoid penalties and interest charges. Late submissions trigger an immediate £100 fine. They can then increase after three months with interest!
Claim Eligible Expenses: Know which expenses you can claim to make the process easier. Especially is its your fist time!
Monthly Reconciliations: Regularly check your income and expenses against your business bank statements. You will avoid more mistakes and keep accurate records before sending them to HMRC.
Need help with your tax return? Book in a call with Lucy below, at a time that suits you.
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