What
Understand the taxes you’ll be paying now, so you can start to put funds aside, ready to pay them later.
Why
Now you’re self-employed, you’ll be responsible for paying your own taxes via self-assessment, rather than PAYE.
Instead of paying your taxes monthly from your salary, you’ll be paying your taxes AFTER your entire financial year has been completed, and once your profits have been calculated.
This means there’s likely to be a lump sum payment due, which, unless you’re putting a little money aside every month, you might not be able to afford.
Understanding what taxes are likely to be due is critical, so you can put money aside for them today, rather than worrying about it later.
What taxes will I be liable to pay?
Generally, most self-employed individuals will be liable to pay:
You might also be required to pay
How?
1/ Read some of the resources below on your tax liabilities - it might seem overwhelming, but the guides from gov.uk and moneyhelper are very clear.
2/ Get into the habit of putting aside a percentage of every payment you take from a customer. It’s sensible to be putting aside at least 30% of each payment (or up to 50% if you’re a higher tax rate payer). Many digital bank accounts allow you to keep money in “pots”, or you could potentially open an additional bank account purely for your tax contributions.
3/ Consider putting more tax aside than needed, so you’re prepared for “payment on account” - there’s a longer task next for this, but you might need to pay your tax in advance of even earning money! There’s no harm in putting more money than you need to in a tax pot - the worst case is you’ll have left over profit at the end of the year.
4/ Use a tool like the gov.uk Income Tax calculator to estimate your liability, or work with your accountant or accounting software to keep track of what tax and national insurance contributions you might need to pay.
5/ Consider working with an accountant or using accounting software, which can help estimate and keep track of your liabilities for both tax and national insurance.
Note: You’ll not need to pay your tax and national insurance contributions until 31st January, following the end of the tax year to which it relates, so you have some time yet.
Further detail
We’ve added a few headline notes on the various forms of tax you’ll be paying, but use the resources to ensure you’re understanding your obligations.
The details we’ve provided below are accurate as of August 2024, but are subject to change. Make sure you’re keeping on top of any changes.
Income Tax
Almost everyone in the UK will be liable to pay income tax - and if you’re a sole trader, this is how you will be taxed on your business earnings.
You pay income tax on any taxable profits your business makes, that’s the money which is left over once you’ve deducted any business expenses.
The amount of income tax you pay will depend on how much profit your business has made within the tax year.
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You’ll pay 0% on profits up to £12,570 - this is your personal allowance.
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You’ll pay 20% (Basic Rate) on your profits up to £50,270
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You’ll pay 40% (Higher Rate) on the next amout of profit up to £50,270
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You’ll pay 45% on profits over £125,140
The amount of income tax you pay on your trading profits is the same as if you were employed.
You can estimate how much income tax you’ll be due to pay, using the Government’s calculator
It’s important to note, if you have other sources of taxable income (i.e you’re also employed), this is all treated as a single income, when you’re a sole-trader.
National Insurance Contributions
Almost everyone in the UK pays National Insurance contributions (NICs), including the self-employed.
Again, National Insurance contributions are based upon your company’s trading profits.
- If your annual trading profits are below £6,725:
- You’ll can pay voluntary Class 2 contributions of £3.45 a week.
- If your annual trading profits are between £6,725 to £12,569:
- Class 2 contributions are treated as having been paid to protect your National Insurance record. This means you do not have to pay Class 2 contributions.
- If your profits are more than £12,570 a year:
- You must pay Class 4 contributions:
- 6% on profits of £12,570 up to £50,270
- 2% on profits over £50,270
If you’ve registered a limited company, things are different. The company itself will pay National Insurabce contributions as an employer, and you will also pay National Insurance contributions on your director’s salary.
Corporation Tax (if you’re a limited company)
If you’re a limited company, you’ll also be paying Corporation Tax on your profits - which is currently 25% (or 19% for companies with profits below £50,000)
VAT (if you’re registered)
If your turnover is over £90,000 (or if you choose to voluntarily register), you’ll also need to be charging your customers VAT, and paying that tax on to HMRC. VAT-registered businesses will generally submit and pay their VAT quarterly.
