How Much Tax Do Self Employed Pay – Having trouble understanding how self-employment taxes work? Are you worried about what to pay, what to do and tell HMRC that you are self-employed?
If you are self-employed, understanding what taxes you have to pay and when is an essential part of running a business, because you are responsible for managing your own taxes and you can face penalties if mistakes are made.
How Much Tax Do Self Employed Pay
In recent years, HMRC has tried to simplify tax for the self-employed, but tackling this can still be a challenge. The good news is that it’s not too complicated to understand, even if you’re employed and self-employed.
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This manual is intended for sole traders and transporters. Different tax rules apply if you have a limited company.
Friendly disclaimer: Even though I am an accountant, I am not your accountant. The information in this article is legally accurate, but is intended for guidance and information purposes only. Everyone’s situation is different and unique, so you should use your best judgment when applying the advice I give to your situation. If you areunsure or have questions, be sure to contact a qualified professional as mistakes can result in fines.
Different tax rates apply to each self-employed person and they have their own threshold for tax exemption. Below is a summary of the fees:
The UK tax year runs from 6 to 5 April each year and all changes to tax rates will take effect at the beginning of each new tax year. Therefore, the amount of tax you have to pay can change every year.
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You will pay income tax on your taxable income – the more you earn, the more income tax you pay. But it’s a sliding scale, so you’ll pay different tax rates depending on how much of your income falls into each tax bracket.
You live in the UK and your taxable trading profits are £40,000 for the tax year 2023-24. You have no other form of income. You will pay income tax of £5,486.20 calculated as follows:
So if you are an employee and self-employed, the tax bracket you fall into will be based on your combination
You live in the UK, earn a total of £40,000 from your job and £20,000 from your page-printing. The amount of income tax you pay is based on your combined income of £60,000, so you would pay income tax of £11,432.60 calculated as follows:
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Your combined income means you currently pay the top tax of 40%. You will most likely receive a personal allowance through your wages.
Read this tax guide if you’re employed and self-employed to learn more about what to check on your payslip.
You don’t have to pay Class 2 NICs if you earn up to the tax-free threshold and it’s not linked to other income you have.
If youare working, you still have to pay Class 1 NI for employment income on your pay slip. However, your employer will be responsible for calculating your Class 1 NIC for you.
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Your taxable trading profits are £40,000 for the tax year 2023-2024. You will pay National Insurance of £2,648.19 calculated as follows:
Follow these five steps to calculate the amount of tax you’ll pay on your self-employment income:
An accounting period is the time period used to report income and expenses to HMRC. Usually 12 months, unless you start or stop working independently.
As a sole trader, the easiest way to report your taxable profits to HMRC and pay tax is to use the same accounting period as the tax year – this makes it easier to complete tax returns and assess your tax invoice just got simpler.
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The tax year runs from 6 April to 5 April, but to simplify reporting for sole traders, HMRC allows a timeframe of 1 to 31 March instead.
To calculate your business profits, you need to add up your total income and expenses for your accounting period. Look at your bank statements, Paypal and Stripe accounts, as well as any invoices you’ve sent to customers. If you decide to use cash accounting, you must add everything you have paid and paid. Meanwhile, if you decide to use traditional accounting, you must add on invoice date, regardless of payment.
If you have not opened a separate business bank account, you may want to consider doing so as it makes tracking your income and expenses much easier.
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Taxable profits are not always the same as business profits, as some expenses are not eligible for tax – in other words, you cannot include them on your tax return, even if they are business related. .
To calculate taxable profits for your business, check your expenses and ‘add back’ any amounts you cannot deduct from your tax bill.
HMRC will calculate the amount of tax you owe from the numbers you fill in on your tax return, you don’t need to calculate your self-employment tax. But once you have taxable profits, you can estimate tax and national insurance using the rates that apply to your accounting period.
Your taxable trading profits for the tax year 2023-24 are £45,216 and you have no other form of income. You will pay income tax of £6,529.50 calculated as follows:
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In addition, you will pay Class 2 and Class 4 National Insurance worth £3,117.68, which includes:
In addition to paying your tax bill, you may also need to make an advance payment on your next tax bill due on January 31 and July 31. This is called paying on account.
Your tax bill for 2023-24 excluding Class 2 National Insurance is £9,467.78 if this is greater than £1,000 you must pay on bill £4,733.89 (9,467.78 ÷ £2) on 31 January and 31 July.
Prepayments are deducted when you file your next tax return. But you also have to make new payments.
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If you file your first tax return and have to pay through your account, you will have to pay an additional year of tax before filing your second tax return.
Read this guide to learn more about paying bills and how to reduce them when your income drops
You must file a tax return once a year to declare the taxable profits of your business. Your tax return is due on January 31 and you must declare information for the previous tax year.
For example, your tax return for the tax year 2023-24 is due on 31 January 2025. So you have around 10 months to complete and submit it to HMRC.
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In addition, you must pay any tax you owe (which HMRC will calculate from the information you fill in on your form) with your first payment into your account by 31 January. You must then make the second payment on account by 31 July.
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