How Do I Pay Tax and National Insurance When Self-Employed? When you are self-employed it is your responsibility to work out your own tax and national insurance, then report it to HMRC. This guide covers everything you need to know about self-employment taxes including how much you can earn before you pay tax and national insurance and a calculator help you work out how much you owe.
Am I Self-Employed?
The way you pay and disclose your tax and national insurance differ depending on your employment status.
Generally speaking there are two different types of UK employment status’;
- Self-Employed or;
Self-Employed vs Employed UK
When you are self-employed you are:
- Responsible for finding your own work;
- Can choose to accept or decline a job;
- Not entitled to any sick pay or holiday pay;
- Must register with HMRC as self-employed;
- Work out your own taxes and declare your income once a year using a self-assessment tax return form.
When you are self employed you must pay:
- Income Tax
- Class 2 National Insurance
- Class 4 National Insurance
When you are employed, your employer is responsible for working out your income tax and Class 1 national insurance on your behalf and paying it over to HMRC as well as giving you a payslip detailing what they have deducted.
How Tax and National Insurance Works If You Are Employed and Self-Employed
If you are employed and self-employed the amount of income tax you pay will be based on your combined earnings.
The amount of national insurance you pay will be worked out on your employment and self-employment income separately.
How Much Tax Do You Pay When You’re Self-Employed?
The amount of income tax you pay is based on your business profits and any other income you have earned for each complete tax year.
The tax year in the UK runs from 6 April to 5 April.
You are entitled to a personal allowance each year, regardless of your employment status. Your personal allowance is the total amount you can earn before you start paying any tax.
How Much Can You Earn Tax-Free When You’re Self Employed
The personal allowance changes at the start of each UK tax year (6 April).
The personal allowance for 2019/2020 is £12,500 and £11,850 for 2018/2019
You are self-employed and your business makes £30,000 profit during 2019/2020. You have no other income so you can earn £12,500 tax-free and you’ll need to pay tax on £17,500 (£30,000 less £12,500).
You are employed and self-employed during the tax year 2019/2020. You earn £30,000 from your employment and £10,000 being self-employed.
You are only entitled to the personal allowance of £12,500 once. This will probably be given to you through your employment, as this is where your highest salary is. Every month when your employer pays you, they will deduct one month’s worth of your personal allowance from your salary before they work out your tax.
Your income from self-employment will not be tax-free as you have used all your personal allowance up against your employment salary.
Personal Allowance Restriction
There is a personal allowance restriction for anyone who earns over £100,000.
Once you earn over £100,000 your personal allowance begins to get taken back at a rate of £1 for £2 you earn, until your income reaches £122,000 and it is clawed back completely.
That means anyone earning over £122,000 does not receive any personal allowance.
How Much Tax Do You Pay If You’re Self-Employed?
When you are self-employed you pay tax on your business profits. You start paying tax on your income over and above the personal allowance.
The amount of income tax you pay goes up the more you earn.
Here are the 2019/2020 income tax rates:
|0% tax (personal allowance)||on the first £12,500||on the first £11,850|
|20% tax (basic rate)||on the next £37,500||on the next £34,500|
|40% tax (higher rate)||on the next £100,000||on the next £103,650|
|45% tax (additional rate)||on everything over £100,000||on everything over £103,650|
You are self-employed and during the tax year 2019/2020 you make a profit of £40,000.
That means you will need to pay tax of £5,500 which is calculated as:
- 0% on the first £12,500 profit
- 20% on the remaining £27,500 profit
You are employed and self-employed. During tax year 2019/2020 you earn
- £40,000 from your employment
- £12,000 profit through self-employment
That means your combined income from both is £52,000.
Your income tax bill for 2019/2020 would be £8,300 which is calculated as:
- 0% on the first £12,500 income;
- 20% on the next £37,500 income;
- 40% on the last £2,000 income.
How Much National Insurance Do You Pay If You’re Self-Employed?
When you are self-employed you need to pay two types of national insurance:
- Class 2 National
- Class 4 National Insurance
The amount of each of these you pay is based on your self-employment profits.
If you are employed and self-employed your employment earnings have no bearing on how much class 2 and class 4 national insurance you pay. You’ll still need to pay Class 1 National insurance on your employment earnings, which your employer will calculate for you.
How Much Is Class 2 National Insurance?
Self-employed individuals pay Class 2 NICs when their profits reach a certain threshold (known as the small profits threshold).
For tax year 2019/2020 self-employed people pay Class 2 NICs on their profits over £6,365 at a fixed amount of £3.00 per week.
If you were self-employed during tax year 2018/2019 the Class 2 national insurance small profits threshold was £6,205 and the weekly amount was £2.95.
Class 2 National Insurance protects your ability to claim certain state benefits like maternity allowance and the state pension. Failing to pay Class 2 national insurance means you may not be able to claim for state benefits or find yourself entitled to a reduced amount.
For this reason, many self-employed people choose to pay Class 2 National Insurance voluntarily.
How Much Is Class 4 National Insurance?
When you are self-employed you pay Class 4 National Insurance on your profits above the small profits threshold.
For 2019/2020 you pay Class 4 National Insurance on your profits between £8,632 and £50,000 of 9% and 2% thereafter.
|Small profits threshold – no NICs below this threshold||£8,632||£8,424|
|Class 4 National Insurance 9%||£50,000||£46,350|
|Class 4 National Insurance 2%||over £50,000||over £46,350|
Molly is a self-employed blogger but also has a part-time job earning £15,000 per year. Her employer has already deducted and paid over £800 of income tax through payroll.
She has worked out that her profits from blogging are £22,000.
She is getting ready to submit her tax return for the tax year 2018/2019 which is due by 31 January 2020.
Molly calculates her income tax as £5,030.
Total income £15,000 + £22,000 = £37,000
Taxable income (after deducting personal allowance £11,850) £25,150
Tax Due £5,030 (£25,150 x 20%)
Molly calculates her Class 2 National Insurance as £153.40 (£2.95 x 52 weeks).
Molly calculates her Class 4 National Insurance as £1,421.55 (£22,000 – £6,205 x 9%).
Molly’s total tax bill is:
- Income tax £5,030
- Class 2 National Insurance £153.40
- Class 4 National Insurance £1,421.55
- Total for 2016/2017 £6,604.95
- Payment on Account £2,825.78
- Total to pay by 31 January 2018 £8,630.73
How Do You Pay Tax and National Insurance When You’re Self-Employed?
When you are self-employed you have to pay your tax and national insurance twice a year – on 31 January and 31 July.
You work out your tax and declare your income once a year to HMRC using a self-assessment tax return form. If you complete this online HMRC will calculate your tax and national insurance for you.
Your self-assessment tax return is due by 31 January each year. One return covers one tax year.
So your tax return for 2018/2019 is due by 31 January 2020. You’ll also need to pay any tax and national insurance due in this return by this date as well as making a payment on account.
A payment on account is a contribution towards your next tax bill and you’ll need to make a second payment by 31 July each year.
Self-Employed Tax and National Insurance Calculator UK
Click here to download my 2018/2019 tax calculator to help estimate your tax and national insurance if you’re self-employed.
Click here to download the 2019/2020 version of the self-employed tax calculator.
Is the First Year of Self-Employment Tax-Free?
No, the first year of self-employment is not tax-free. Often if someone is new to self-employment their earnings can be low or they have bought start-up materials that wipe out their business profits. This means their personal allowance covers any income they have made or they have made a tax loss, so they have no tax to pay.
All earnings need to be declared to HMRC on a self-assessment tax return, regardless of whether there is any tax to pay or not.
What Happens if you don’t Pay Self-Employment Taxes?
If you don’t pay self-employment taxes because your earnings are below the personal allowance, then there is nothing to worry about. As long as you declare your income properly to HMRC.
If you don’t pay self-employment taxes but know that you should have registered with HMRC as self-employed, then you can face penalties for failing to register, file tax returns and not paying taxes.
What Happens if I don’t Pay National Insurance Contributions
If you don’t pay national insurance contributions because your earnings are below the small profits threshold, then this is absolutely fine.
Not paying Class 2 national insurance however can have an impact on your ability to claim state benefits, so you may want to consider paying it voluntarily.
Updated 3 April 2019
Anita is a Chartered Accountant with over a decade of experience taking self employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which her corner on the internet where she makes self employment less terrifying.