Money Matters

How to calculate self employed income tax

Find out everything you need to know to calculate self employed income tax, including the tax bands and rates, and how to submit your taxes.

Self employed woman doing self assessment income tax return

Being self-employed in the UK comes with plenty of perks–working on your own terms, setting your own hours, and being your own boss.

However, one of the more complex aspects of being self-employed is calculating and managing your own taxes. With no employer automatically deducting tax, it’s up to you to understand how much you owe and how to pay it.

Don’t worry, though–calculating self-employed income tax doesn’t need to be stressful.

In this guide, we’ll walk you through everything you need to know to calculate self employed income tax, giving you the confidence to stay on top of your finances and avoid any unpleasant surprises when tax season rolls around.

How self-employed income tax works in the UK

As a self-employed worker, you won’t receive a salary with taxes deducted at source like an employee would. Instead, you pay income tax on your profits–your total income minus any allowed business expenses. You’re responsible for calculating what you owe and paying it through the HMRC Self Assessment system.

The UK tax year runs from 6 April to 5 April the following year. When you’re self-employed, you’ll need to submit a Self Assessment tax return each year by the deadline of 31 January, detailing your earnings, expenses, and profit for the previous tax year.

Sounds straightforward enough, right? Let’s break down the steps of how to calculate your self-employed income tax.

Step 1: Work out your taxable income

The first step in calculating your income tax is determining your taxable income. This is your total self-employed earnings minus any relevant expenses.

These expenses can include things like equipment, travel, or a portion of your home office expenses. HMRC has detailed guidance on what counts as an allowable business expense–common items include:

  • Office costs: this could be anything from stationary and electricals, to rent for an office space, or even a portion of your utility bills if you work from home.
  • Travel expenses: business-related travel like mileage, train fares, and accommodation can be claimed.
  • Marketing costs: any money you spend on advertising, website hosting, or promotional material is also deductible.
  • Professional fees: if you need to hire an accountant or pay for legal advice, these are tax-deductible.

It’s important to keep detailed records of your expenses to avoid any problems with HMRC, and to make sure you don’t miss out on deductions that could reduce your taxable income.

Once you’ve deducted your allowable expenses from your income, what remains is your taxable income, which is the figure you’ll use to calculate your tax bill.

Step 2: Apply the tax bands and rates

Now that you’ve worked out your taxable income, the next step is to figure out how much tax you’ll need to pay based on the current UK tax bands and rates.

For the tax year 2024/25, the tax bands are:

  • Personal Allowance: the first £12,570 of your income is tax-free.
  • Basic rate (20%): for earnings between £12,571 and £50,270, you’ll pay 20%.
  • Higher rate (40%): if your earnings fall between £50,271 and £125,140, the higher rate of 40% applies.
  • Additional rate (45%): any earnings above £125,140 are taxed at 45%.

Let’s say your taxable income is £40,000. The first £12,570 is tax-free due to your Personal Allowance. You’ll then pay 20% tax on the remaining £27,430 (£40,000 – £12,570), which amounts to £5,486 in income tax.

Step 3: Don’t forget National Insurance contributions (NICs)

In addition to income tax, self-employed workers also need to pay National Insurance contributions (NICs). This is a contribution towards state benefits like the NHS, pensions, and unemployment benefits. For self-employed people, there are 2 classes of National Insurance to consider:

  • Class 2 NICs: if your profits are over £12,570 a year, you’ll pay Class 2 NICs at a flat rate of £3.45 per week for the 2023/24 tax year.
  • Class 4 NICs: this is calculated based on your profits. You’ll pay 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

Using the same example of £40,000 in profits, you’d pay the following Class 4 NICs:

  • 9% on the £27,430 profit that’s between £12,570 and £50,270, which works out to £2,468.70.

You’ll also need to pay the weekly Class 2 NICs, which is £3.45 per week, adding up to £179.40 for the year.

Step 4: Submit your Self Assessment tax return

Once you’ve calculated your tax and National Insurance contributions, the next step is to submit your Self Assessment tax return. This can be done online through the HMRC website, and you’ll need to file your return by the 31 January deadline when the previous tax year has ended.

If this is your first time registering for Self Assessment, allow plenty of time for your registration and security set up documents to arrive. This could take a week or more so don’t apply to register for Self Assessment on 31 January!

When filling in your Self Assessment form, you’ll be asked for more details of your income, any relevant expenses, and any other sources of earnings (such as dividends or property income). The system will automatically calculate how much tax and National Insurance you owe based on the information you input.

It’s really important to stay on top of the deadlines, as missing the deadline for submitting your tax return or paying your bill can result in hefty penalties. If you’re unsure about any part of the process, you might want to consider hiring an accountant or using accounting software to help you stay organised.

Practical tips for managing your tax obligations

Calculating your tax is just one part of managing your finances as a self-employed worker. Here are a few practical tips to help you stay on top of your tax obligations and avoid any last-minute stress:

  1. Set aside money for tax: one of the most common challenges self-employed workers face is forgetting to save for their tax bill. A good rule of thumb is to set aside around 30% of your profits to cover both income tax and NICs. That way, you’ll have the funds ready when the payment deadlines come around.
  2. Keep detailed financial records: HMRC requires you to keep records of your income and expenses for at least 5 years after the tax year ends. Accurate records not only help you fill in your Self Assessment tax return correctly, but they also mean you can claim all the expenses that you’re entitled to, potentially meaning you can reduce your tax bill.
  3. Use accounting software: tools like Sage Accounting can simplify the process of tracking your earnings, expenses, and taxes. These tools can help you estimate what you owe in tax in real-time, giving you peace of mind throughout the year.
  4. Plan for your tax payments: one thing many self-employed people aren’t aware of is that you’ll likely need to make 2 payments on account each year, which are advance payments towards your tax bill. These are due on 31 January and 31 July, with any balancing payment due by the following 31 January. Make sure you factor these into your financial planning to avoid cash flow problems.
  5. Seek professional advice: if your tax situation is complicated, or if you’re new to self-employment, it may be worth speaking to an accountant. They can help make sure you’re claiming all the deductions available to you, as well as providing expert advice on managing your tax affairs.

Final thoughts

Self-employment gives you freedom and control over your work, but it also means taking responsibility for managing your own taxes. While calculating income tax as a self-employed worker may seem a bit daunting, the key is to stay organised, keep track of your expenses, and understand how the tax system works.

By following these steps and tips, you’ll be well-prepared to handle your tax obligations and avoid any unexpected bills. With a little preparation, you can focus on what you do best—running your business—without worrying about tax season.