Self-Employed: How to calculate your tax?

It is more common than ever to become self-employed. With the rise of remote-working, more professionals are tuning in to the benefits of being self-employed. However, with self-employment comes new questions and challenges.; for example – how do you calculate self-employment tax?

Before we go into how you calculate your tax, there are a few essential points to address. These may seem obvious, but it is because of this that they can be so easy to overlook.

Register yourself as self-employed

Register yourself as being self-employed straight away. Even if you are yet to find clients, if you have decided to be self-employed, then tell HMRC. This can save you a lot of hardship in the future, and HMRC can even provide helpful tools and resources to help you on your journey.

The latest you can register as self-employed with HMRC is October 5th, after the end of the tax year in which you first became self-employed.

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How much tax-free income can you earn?

There are similar rules on this for both employed and self-employed workers. Be careful that you work this out correctly, as declaring the incorrect numbers can be seen as tax avoidance. Luckily, it does not have to be challenging to work this out.

For the tax year running from 2020/21, the standard personal allowance (how much you can earn before paying tax) is £12,500.

Once you earn over £100,000, this personal allowance is reduced by £1 for every £2 of income over that £100,000 you make in the 2020/21 tax year.

If you are also working in a second job as an employee, then this personal allowance will automatically only apply to your employed work, not your self-employed work. This could mean that any income you make in your self-employed work may be liable for tax to be paid on it.

You can find out if this is the case by checking your tax code. HMRC can quickly tell you this.

Calculating National Insurance

You will need to pay National Insurance while being self-employed, much the same as you would as an employee.

The self-employed will mostly pay Class 2 NICs (National Insurance Contributions), on any profits at or above £6,365 in the tax year 2019/20, and £6,475 in 2020/21.

Anything over this limit and you will need to pay £3 per week or £156 per year for 2019/20. For the tax year 2020/21, it will be £3.05 per week or £158.60 per year.

You will need to pay Class 4 NICs if you make £8,632 or more in the tax year 2019/20. For 2020/21 the threshold is £9,500. If you are above these amounts, you will need to pay 9% on any profits between £8,632 and £50,000 for 2019/20. For 2020/21 these amounts are £9,500 and £50,000. You must also pay 2% on any profits above these amounts.

Calculating Income Tax

When working out your income tax, remember that for those who are self-employed, income tax is based only on your profits, not your total income. This means you should deduct any expenses from that total before working out your income tax.

Otherwise, the income tax you pay is while self-employed is much the same as for employed people.

There are four rates of income tax for the tax years 2019/20, and 2020/21.

These are:

•  The Personal Allowance (0%). Profits between £0 – £12,500 are taxed at 0%
• The Basic Rate (20%). Profits between £12,501 – £50,000 are taxed at 20%
• The Higher Rate (40%). Profits between £50,001 – £150,000 are taxed at 40%
• Additional Rate (45%). Profits of over £150,000 are taxed at 45%

How to pay your tax?

Every tax year will require you to submit a Self-Assessment tax return. 

The deadline for 2019/20 is October 31st 2020 for paper tax returns and January 31st 2021 for online tax returns.

These self-assessment tax returns will include your total income and expenses for that year, so be sure to keep sufficient records of these as you go.

Once you have done this, you will then be informed as to how much tax and National Insurance you owe to HMRC. The deadline for these payments is January 31st 2021 for the 2019/20 year.

Paying tax when self-employed

As we have seen, paying tax while being self-employed does not need to be a nightmare. As long as you are organised and keep track of your finances, this chore can be painless and straightforward.

Need more information on paying taxes as a self-employed worker? Our tax solicitors are available now to answer any questions you might have!