How to calculate income tax for self-employed people

There are many benefits to being self-employed in the UK: you can work on your own terms, set your own hours and be your own boss.

However, one of the more complex aspects of self-employment is calcu­lating and managing your own taxes. Since no employer automat­i­cally deducts taxes, it’s up to you to under­stand how much you owe and how to pay it.

But don’t worry – calcu­lating self-employed income tax doesn’t have to be stressful.

In this guide, we’ll walk you through every­thing you need to know about calcu­lating self-employed income tax. This gives you the security to stay on top of your finances and avoid unpleasant surprises when tax season is just around the corner.

This is how self-employed income tax works in the UK

As a self-employed person, you do not receive a salary with withholding tax like an employee. Instead, you pay income tax on your profits – your total income minus allowable business expenses. You are respon­sible for calcu­lating your debts and paying them through the HMRC self-assessment system.

The UK tax year runs from April 6th to April 5th of the following year. If you are self-employed, you must submit a self-assessment tax return by January 31st each year, detailing your income, expenses and profits for the previous tax year.

Sounds pretty simple, right? Let’s break down the steps for calcu­lating self-employed income tax.

Step 1: Calculate your taxable income

The first step in calcu­lating your income tax is deter­mining your taxable income. This is your total income from self-employment minus any expenses incurred.

These expenses can include things like equipment, travel, or some of your home office expenses. HMRC has detailed guidance on what counts as an allowable business expense. Common items include:

• Office costs: This can be anything from stationery and electronics to office space rent or a portion of your utility bills if you work from home.
• Travel expenses: Business trips such as mileage allowance, train tickets and accom­mo­dation can be claimed.
• Marketing costs: Any expenses you spend on adver­tising, website hosting, or promo­tional materials are also deductible.
• Profes­sional fees: If you need to hire an accountant or pay for legal advice, these are tax deductible.

It’s important to keep detailed records of your expenses to avoid problems with HMRC and to ensure you don’t miss out on deduc­tions which could reduce your taxable income.

After you subtract deductible expenses from your income, you’re left with your taxable income, which you use to calculate your tax bill.

Step 2: Apply the tax brackets and rates

Now that you’ve worked out your taxable income, the next step is to work out how much tax you’ll have to pay based on current UK tax bands and rates.

The following tax brackets apply for the tax year 2024/25:

• Personal grant: The first £12,570 of your income is tax free.
• Basic rate (20%): If you earn between £12,571 and £50,270 you pay 20%.
• Higher rate (40%): If your income is between £50,271 and £125,140, ​​the higher rate of 40% applies.
• Additional tariff (45%): Any income over £125,140 is taxed at 45%.

Let’s say your taxable income is £40,000. The first £12,570 is tax-free due to your personal allowance. You will then pay 20% tax on the remaining £27,430 (£40,000 — £12,570), which equates to income tax of £5,486.

Step 3: Don’t forget about National Insurance Contributions (NICs)

In addition to income tax, self-employed people also have to pay National Insurance Contri­bu­tions (NICs). This is a contri­bution to government benefits such as the NHS, pensions and unemployment benefits. There are two classes of social insurance to consider for the self-employed:

• Class 2 NICs: If your profits are over £12,570 per year, you will pay Class 2 NICs for the 2023/24 tax year at a flat rate of £3.45 per week.
• Class 4 NICs: This is calcu­lated based on your winnings. You pay 9% on winnings between £12,570 and £50,270 and 2% on winnings over £50,270.

Using the same example with a profit of £40,000 you would pay the following Class 4 NICs:

• 9% on profits of £27,430, which is between £12,570 and £50,270, which is £2,468.70.

You will also need to pay Class 2 weekly NICs which are £3.45 per week, adding up to £179.40 for the year.

Step 4: Submit your self-assessment tax return

Once you have calcu­lated your tax and national insurance contri­bu­tions, the next step is to submit your self-assessment tax return. This can be done online via the HMRC website and you must submit your tax return by January 31st when the previous tax year ends.

If you are regis­tering for the self-assessment for the first time, allow enough time for your regis­tration and security documents to arrive. This may take a week or longer. So don’t sign up for the self-assessment on January 31st!

When completing your self-assessment form, you will be asked to provide further infor­mation about your income, any relevant expenses and other sources of income (e.g. dividends or investment income). The system will automat­i­cally calculate how much tax and national insurance you owe based on the infor­mation you enter.

It’s really important to stick to deadlines as missing the deadline to file your tax return or pay your bill can result in hefty penalties. If you are unsure about any part of the process, consider hiring an accountant or using accounting software to keep track.

Practical tips for managing your tax obligations

Calcu­lating your taxes is just one part of managing your finances as a self-employed person. Here are a few practical tips to help you stay on top of your tax oblig­a­tions and avoid last-minute stress:

1. Set aside money for taxes: One of the most common challenges for self-employed people is forgetting to save for their tax bill. A good rule of thumb is to set aside around 30% of your profits to cover income tax and national insurance contri­bu­tions. This way you will have the money ready when the payment deadlines expire.
2. Maintain detailed financial records: HMRC requires you to keep records of your income and expenses for at least five years after the end of the tax year. Accurate records will not only help you complete your self-assessment tax return correctly, but will also mean you can claim any expenses you are entitled to, which may mean you can reduce your tax bill.
3. Use accounting software: Tools like Sage Accounting can make tracking your income, expenses and taxes easier. These tools can help you estimate your tax liabil­ities in real time, giving you peace of mind all year long.
4. Plan your tax payments: One thing that many self-employed people don’t realize is that you’ll likely have to make two installment payments each year, which are advance payments on your tax bill. These are due on January 31st and July 31st, with the balance due by the following January 31st. Be sure to take these into account in your financial planning to avoid cash flow problems.
5. Get profes­sional advice: If your tax situation is compli­cated or you are new to self-employment, it may be worth speaking to a tax advisor. They can help ensure you take advantage of all the deduc­tions available to you and provide you with expert advice on managing your tax affairs.

Final thoughts

Self-employment gives you freedom and control over your work, but it also means you take respon­si­bility for managing your own taxes. Although calcu­lating income tax as a self-employed person may seem a bit daunting, it’s important to stay organized, keep track of your expenses and under­stand how the tax system works.

By following these steps and tips, you will be well prepared to meet your tax oblig­a­tions and avoid unexpected bills. With a little prepa­ration, you can focus on what you do best—running your business—without worrying about tax season.