How Income Tax Works for the Self Employed

Employees get paid via their employer’s payroll and are issued a payslip each time they are paid.  The payslip will detail gross pay and deductions such as pension contributions, national insurance contributions (NIC) and income taxes.  This is because employee operate under Pay As You Earn (PAYE), this means income taxes are calculated and deducted by your employer immediately and paid to HMRC under Real Time Information (RTI) reporting.  NIC is also deducted from pay at the same time.

Self-employed individuals are personally in business and therefore also subject to income tax at the same rates as employees although NIC rates do differ.

National Insurance

We have covered NIC rates for the self employed previously but as a simple reminder:

• Profits below £6,725 pa = There is no requirement to pay NIC, but you can pay Voluntary Class 2 NIC at £3.45 per week to get credits towards your state pension.
• Profits between £6,725 pa and £12,270 pa = There is no requirement to pay NIC, but you still get credits towards your state pension without having to pay you Voluntary Class 2 NIC of £3.45 per week.
• Profits over £12,270 = You pay Class 4 National Insurance Contributions, and you get credits towards your state pension.  Profits £12,570 - £50,270 = 6% NIC, Profits over £50,270 = 2% NIC.

See Should I Go Self Employed?

Income Tax

As a self-employed person, you are trading in business for yourself personally.  You are personally liable to income tax on profits.

• Income less allowable expenses = Profit before tax
• Tax rates:
• £12,570 Personal Allowance usually (unless adjusted by HMRC) = 0%
• £12,571 - £50,270 (i.e.  next £37,700) = 20% Basic Rate Tax
• £50,271 - £125,140 (i.e.  next £74,870) = 40% Higher Rate Tax
• Over £125,140 = 45% Additional Rate Tax
• Please note income tax thresholds and rates differ in Scotland.
• The trading year for the self employed is now the same as the tax year i.e., 6^th April to 5^th April.
• Taxes are not paid under PAYE but are paid via self assessment with a series of potentially 3 income tax payments in = 2 Payments on Account (POA) and 1 X Balancing Payment (BP).

Income Tax Payment Dates for Self-Employed

Let’s look at the current tax year 2024/2025.

• 6^th April 2024 – start of trading year/tax year.
• 31^st January 2025 (some 9 months later) – 1^st Payment on Account is made.  This is the equivalent of 50% of total income taxes paid for the previous tax year 2023/2024.
• 5^th April 2025 – end of trading year/tax year.
• 31^st July 2025 (3 months after end of tax year and 15 months after the start of the tax year) – 2^nd Payment on Account is made.  Again, this is the equivalent of 50% of total income taxes paid for the previous tax year 2023/2024.
• If you have had a poorer trading year for 2024/25 when compared to the previous tax year 2023/24, you can ask HMRC if you can reduce your 2^nd POA or even make it your final ‘balancing payment’.
• 31^st January 2026 (some 9 months after the end of the tax year and a staggering 21 months after the start of the tax year), you make your final balancing payment for tax due for 2024/25.
• Don’t forget on this same date, you are also required to make your 1^st Payment on Account for tax year 2025/26.

£1,000 Hobby Income/Ad-hoc Self Employment - if you operate a ‘hobby’ business e.g., selling on websites such as eBay or Amazon or Vinted, or do some ad-hoc gardening for a neighbour and your total income (not profit) is below £1,000, there is no requirement to complete self assessment returns.

Making Tax Digital (MTD) for Income Tax and Self Assessment (ITSA)

Limited companies have been required for many years to complete quarterly returns to HMRC e.g., VAT returns to ensure taxes are paid promptly.  This must be done via a recognised software package that sends electronic messages direct to HMRC.

• MTD – ITSA for the for the Self-Employed and Landlords is due to start in April 2026. 
• This means that quarterly tax returns (using approved software), will be required in the same way that limited companies have to do quarterly returns.
• Quarterly ‘electronic’ returns detailing quarterly trade figures.
• End of Year/Period ‘Trading’ Statement of income less expenses to show profit for year.
• Final Statement detailing all income from self employment, any employed income, taxable interest, dividends, pension income, property income and any other taxable investment income.
• From April 2026 - where self-employed profits are over £50,000 pa.
• From April 2027 - where self-employed profits are over £30,000 pa.

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