If you are self-employed you can earn up to £1,000 each tax year before paying tax in the UK by taking advantage of the trading income allowance. It’s a tax-free amount you can get paid in income (not profit) without letting HMRC know and avoid registering as self-employed.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
Once your income goes over £1,000, you can then earn up to £12,570 in profit** for the tax year 2022-23 before paying tax because of the personal allowance (unless you are using this allowance elsewhere, for example, through a payslip). At this point, you’ll need to register as self-employed and let HMRC know about your earnings on a tax return, even if you have no tax to pay because your business made a loss, for example.
Once your profits go over the tax-free amount you’ll start to pay income tax as follows:
- 20% (basic rate) on profits between £12,570 to £50,270
- 40% (higher rate) on profits between £50,271 to £150,000
- 45% (additional rate) over £150,000
If you have other forms of income then you’ll pay income tax based on your combined earnings.
Once you’re registered as self-employed you’ll also need to pay class 2 and class 4 NI on your business profits. You won’t pay any NI if you earn up to the tax-free thresholds. Here are the self-employed national insurance rates for the 2022-23 tax year:
- Class 2 National Insurance £3.15 per week on profits over £6,725 per year
- Class 4 National Insurance 10.25% on profits between £9,880 and £50,270 and 3.25% thereafter.
**Business profits means all your income less allowable expenses.