Your friendly walkthrough of self-employed income tax + free calculator

There’s nothing quite like the feeling of going out on your own as a sole trader or a director of a limited business. It gives you the freedom to choose your clients, set your schedule and – best of all – be your own boss.

But for many people, the financial side of going self-employed can be a bit daunting. You’ve never had to do your own taxes before. What happens if you get things wrong? This is the biggest worry people have before making the switch.

So let’s take a few minutes to demystify the maths behind self-employed Income Tax and explain how it applies to sole traders, directors of limited businesses and those in partnerships. 

Once you’ve equipped yourself with this essential tax knowledge, you’ll be all set to start your next chapter with confidence.

What is self-employed Income Tax?

Self-employed Income Tax is the amount you need to pay to HM Revenue and Customs (HMRC) for your tax and National Insurance contributions. The process of calculating and paying your bill is called Self Assessment, but you may also hear people talk about filling out, doing or paying their tax return. 

If you’re new to self-employment but you’ve had experience as an employee, you might not realise you need to keep track of your own tax liabilities. As an employee, your tax calculations are generally done for you by your employer and automatically deducted from your wages.

Once you step into the world of running your own business, however, filing your Self Assessment becomes an obligatory part of your working life. 

Here are the three main differences between employed and self-employed income tax:

1. How you work it out

• Employed: Your employer works out your tax and National Insurance contributions on your behalf.
• Self-employed: You fill out a Self Assessment tax return to find out how much you need to pay. We’ve created a free calculator tool that makes it far easier to work out what you owe. Click here to give it a try. 

2. How you pay

• Employed: Your employer pays your tax and National Insurance, leaving you with your take-home pay. You then see these as deductions on your payslip.
• Self-employed: You pay your Self Assessment tax bill on the government website, just like you would any other online payment.

‍3. When you pay

• Employed: You pay your tax and National Insurance as often as you’re paid by your employer – usually monthly or weekly.
• Self-employed: You pay your tax and National Insurance between the end of the tax year and 31st January the following year. If your Self Assessment tax bill is more than £1,000, you may also need to make payments on account.

What are the self-employed Income Tax rates for 2022-23?

The Income Tax threshold for 2023-24 is £12,570. You won’t need to pay tax on anything you earn up to that amount.

Here’s a breakdown of all the Income Tax rates for 2023-24:

• 0% on the first £12,570
• 20% tax on income between £12,571 and £50,270
• 40% tax on income between £50,271 and £150,000
• 45% tax on income over £150,000

You can also see the rates for National Insurance contributions here.

Self-employed Income Tax rates are exactly the same as they are for good old-fashioned employment. The only bonus is that, when you’re self-employed, you only pay tax on your profit.

That’s where income and expenses come in.

How to work out your income and expenses

When filling out a Self Assessment to calculate your self-employed Income Tax, you’ll be asked to enter your income and expenses for the tax year. HMRC will then deduct your expenses from your income to work out your profit.

Here’s a quick explainer of what each of these terms mean:

• Income – all your earnings before deducting any expenses, tax or National Insurance contributions
• Expenses – the total you’ve spent on business running costs and materials
• Profit – your income minus your expenses.

Remember, you only pay tax on your profit when you’re self-employed. So when you’re working out how much you’ll need to pay, you should use your expected profit.

Let’s take a look at a quick example.

Self-employed income tax example

Meet Jess, our fictional freelance designer. She usually works from home but occasionally rents a desk at a co-working space to do a bit of networking.

Here’s a breakdown of her income, expenses and profit for the tax year 2023-24:

• Income – £60,000
• Expenses – £4,000 (co-working space, work iPad, website running costs)
• Profit – £56,000

Now let’s use Jess’s profit to work out how much tax she’ll need to pay:

• Jess pays no income tax (0%) on the first £12,570
• Jess pays £7,540 (20%) on profits between £12,571 and £50,270
• Jess pays £2,292 (40%) on profits between £50,271 and £56,000

Jess’s total tax bill: £9,832

Don’t forget – these calculations don’t include National Insurance contributions and other considerations like student loan repayments. 

See our guide to Class 2 National Insurance Contributions to learn more about how this affects your self-employed profits and your overall finances. 

Estimate your income tax with our free calculator

We know how complex all of this can sound, especially to those new to self-employment. However, we don’t want you to feel overwhelmed – it’s important that you understand how tax works, but it shouldn’t distract you from your original purpose in striking out on your own to start a business. 

Rather than having to spend time manually calculating your taxes, you can use our free income tax calculator to get an idea of what you’ll owe. If you want further help, why not use Crunch’s accountancy software to take care of the whole process for you? Not only does our software help track your income and expenses, but we can also prepare and submit your Self Assessment, removing yet another worry from your list. 

How to complete a Self Assessment form

We’ve discussed the thresholds involved in calculating your taxes, but we’ve only skirted around the actual process by which you’ll receive your tax bill. As a sole trader, director of a limited company or owner of a Limited Partnership, you’ll need to complete a Self Assessment tax return. 

Most people choose to do this online – with many preferring to rely on expert help from accountants and other tax professionals to do it on their behalf. If you want to try and go it alone, we’ve created a full guide to completing your Self Assessment  you can follow here. 

Some people prefer not to use digital services and instead complete Self Assessment by filling out an SA100 paper form and mailing it to HMRC. If you’d like to use a paper form, you’ll need to request it early on in the process to avoid missing the deadline. 

What are the Self Assessment deadlines for 2023-24 and when do you pay?

If you’re going self-employed and filing for Self Assessment for the first time, there are a few different deadlines you’ll need to consider.

Below, we’ll look at the deadlines for the current tax year – 6th April 2023 to 5th April 2024.

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Registering for Self Assessment: 5th October 2023

The first step on the road to paying your own tax and National Insurance is registering for Self Assessment. The deadline for this will be 5th October 2023, which is six months after the end of the tax year.

Here’s what HMRC says about this deadline:

“Register by 5 October in your business’s second tax year. You could be fined if you do not.”

Submitting a paper tax return: 31st October 2023

If you want to submit a paper tax return, this needs to be sent to HMRC by 31st October 2023. 

It can take a little while to download, print and fill out the forms, so it’s best to start well in advance to make sure you don’t miss the deadline.

Or better yet, save the trees and submit your tax return online.

Submitting an online tax return: 31st January 2024

When you submit your tax return online, you have an extra three months compared to the paper option. For the 2022-23 tax year, the deadline is 31st January 2024.

Or if you’re keen to get it out the way, you can submit your tax return as early as 6th April 2023. 

‍Paying your tax bill and first payment on account: 31st January 2024

If your Self Assessment tax bill is more than £1,000, you’ll likely need to make two payments by 31st January 2024.

Here’s a quick summary of the two payments:

1. Your full Self Assessment bill for the 2022-23 tax year
2. A payment on account for the 2023-24 tax year (50% of your 2022-23 tax bill)

Payments on account are designed to let you pay your tax bill in advance, rather than holding onto the money until the following January.

Read our guide for more information about payments on account.

Paying your second payment on account: 31st July 2024

The last deadline for Self Assessment is for your second payment on account. This needs to be paid by 31st July 2024.

Just like your first payment, your second payment on account will be 50% of your 2022-23 tax bill. The idea here is that, if your tax bill for 2023-24 is the same as 2022-23, you’ll already have covered the cost by the time you submit your next tax return.

Two easy ways to reduce your income tax when you’re self-employed

1. Claim for all your allowable expenses

When you’re self-employed, you need to pay for certain things that would usually be covered by your employer. That includes everything from pens and notebooks to keeping your office warm in the winter.

Here’s what HMRC says you can claim for when you’re self-employed:

• Office costs, for example, stationery or phone bills
• Travel costs, for example, fuel, parking, train or bus fares
• Clothing expenses, for example, uniforms
• Staff costs, for example, salaries or subcontractor costs
• Things you buy to sell on, for example, stock or raw materials
• Financial costs, for example, insurance or bank charges
• Costs of your business premises, for example, heating, lighting, business rates
• Advertising or marketing, for example, website costs
• Training courses related to your business, for example, refresher courses

If you work from home, you may also be able to claim for some of your household bills. Learn more about self-employed expenses.

2. Use your Marriage Allowance

The Marriage Allowance is a way for married couples and civil partners to share their personal allowance and reduce their overall tax bill.

You could benefit if:

• You’re married or in a civil partnership
• One of you earns less than £12,570
• The other earns between £12,571 and £50,270

If you tick all the boxes, the lowest earner can transfer up to £1,260 of their personal tax allowance to the higher earner.

This can cut your tax bill by up to £941.50 per year – and you can back-claim up to four years.

‍Frequently asked questions about self-employed Income Tax

How much can you earn tax-free if you’re self-employed?

You can earn £12,570 tax free when you’re self-employed. This is the same as the tax-free allowance for regular employment. But even if you earn less than the threshold, you still need to complete a tax return. You’re only exempt from submitting a Self Assessment tax return if you earn less than £1,000 from self-employed work.

Do you pay more income Tax when you’re self-employed?

No, you don’t pay more Income Tax when you’re self-employed. The tax rates for employed and self-employed people are exactly the same. You may even be able to pay less tax if you’re self-employed by claiming for allowable business expenses. This includes things like office costs, equipment, and work uniform.

It isn’t all about tax, of course. Regular employment has its perks too, like workplace pensions or paid leave when you’re sick, on holiday or having children. You should consider all of these factors when choosing whether self-employment is right for you.

What if you can’t pay your Self Assessment tax?

For self-employed people and business owners, income tax payments can be a headache because you typically pay twice in one year due to ‘payments on account’. If your tax payment responsibilities are causing you financial issues and you’re struggling to repay HMRC, you’ll have to ask for a Time to Pay arrangement to be set up. If approved, HMRC will allow you to repay via monthly installments rather than in a single lump sum. Learn more about how this works in our ‘what if I can’t pay my self assessment tax’ guide. 

How do you work out how much to set aside for tax?

You can use our calculator tool to get an estimate for your tax and National Insurance bill for 2022-23. It’s then a good idea to put money aside for your tax bill on a monthly basis – maybe in a savings account or ISA. This gives you the peace of mind that all the money in your current account is disposable income and avoids the risk of accidentally spending more than you can afford.

What happens if you don’t report self-employed income?

If you fail to report self-employed income on which tax is due and you get caught by HMRC, you’ll need to pay the tax bill plus interest and penalties. In more serious cases, there’s a risk of prosecution and imprisonment.

HMRC is hot on the case with tax avoidance and actively searches for undeclared income. If you feel you’re at risk, you should admit tax fraud and seek professional advice.

What should you do if you have problems completing your tax return?

If you’ve had a go at completing your Self Assessment tax return but are getting tied in knots by all the jargon, you can get an expert to take care of it for you. Crunch offers a Self Assessment service for a one-off fee of £140+VAT for the tax year — and as long as you sign up within three days of your deadline, everything will be taken care of on time. 

What if you make a mistake on your tax return?

If you make a mistake on your Self Assessment tax return, you can log in and make changes any time in the next three days. But any changes still need to be submitted by the 31st January deadline. So if you wait until deadline day to submit your Self Assessment, you’ll only have until midnight to make any changes.

After this deadline, you’ll need to write to HMRC to explain what changes you wish to make. Your bill will then be updated and, depending on what you report, your bill may go up or down.