How Much Do Self-Employed Get Taxed?

Starting Out 

It’s a legal requirement to register with HMRC if your earnings as a self-employed sole trader are more than £1,000 in a tax year. 

When you reach that threshold, congratulations! You officially have a business, not a hobby. 

HMRC recommends that you let them know as soon as you begin trading so that you will be assigned a Unique Taxpayer Reference number. For the first year you’re self-employed, there could be a lengthy delay before you pay any tax, but, when it arrives, the bill could cover 18 months’ profits so will more than likely be larger than expected. 

Tax-Free Allowances 

If you’re self-employed you’re entitled to the same personal tax-free allowance as someone who is employed. See table for tax and national insurance figures. 

Being self-employed, the amount of tax you are liable to pay is based on profit and not on your earnings so you get to offset your business expenses against your income and this will therefore reduce the profit and the tax liability. 

If you expect to earn less than £13,000, setting aside 10-15% of your earnings to cover your tax bill should be more than enough. And any extra will help if you’re landed with an unexpected Payment on Account bill from HMRC. 

What self-employed expenses can I claim to reduce tax? 

This can be complicated – particularly as self-employed work varies from person to person. 

If you use business premises you can claim:  

You can’t claim: Initial cost of buildings, alterations and improvements – although this may qualify for capital allowances which would also include the purchase of equipment such as computer or office equipment for the business. 

If you run your business from home, you can claim a proportion of the costs for:  

• Lighting and Heating  
• Cleaning 
• Insurance 
• Mortgage interest and Council tax  
• Water rates  
• General maintenance 
• Claiming travel and accommodation expenses  
• Travel and accommodation on business trips and between different places of work.  
• Running costs of a vehicle, including petrol, car tax, insurance, repairs and servicing. If you use the vehicle privately, you can only claim a proportion of the costs depending on how much the vehicle is used for business purposes.  

You can’t claim: Travel between home and workplace. The cost of buying a vehicle (though it may qualify for capital allowances). 

If you employ staff 

This includes other expenses that can be claimed for staff wages and NI and pension benefits. You can’t claim your salary or any money taken from the business, your own NI contributions or pension. 

National Insurance for the self-employed  

Self-employed people pay a lower rate of National Insurance compared to employees. Depending on how much they earn, the self-employed have to make Class 2, and potentially Class 4 contributions. For figures see table above. 

Are You Tax Ready? 

The earlier you plan for tax, the easier it will be. At first, especially if you don’t know how successful your business will become, it can be easy to put it off until ‘later’. But accounting and bookkeeping is more than just making sure your business is compliant. It helps you understand the best way forward for you and your work, so you can make more money, do what’s profitable, and make a real difference.  

Kidwells Accountancy is lead by a Chartered Accountant and qualified bookkeeper, so in jargon-free terms we know what it takes for a business to be financially healthy. By the books. Contact us for a free initial call to get advice and see whether an accountancy firm can help you build a better business.