Being self-employed comes with a lot of freedom, but it also comes with responsibilities – one of the biggest being tax. Unlike employees who have tax automatically deducted from their pay, self-employed individuals need to calculate and set aside their own tax payments. Get it wrong, and you could face an unexpected (and costly) bill.
Here’s (most) what you need to know to stay on top of your tax liabilities.
Income Tax: What you need to pay
If you’re self-employed, you pay Income Tax on your profits after allowable business expenses.
The tax rates for the 2024/25 tax year are:
- £0 – £12,570 – Tax-free Personal Allowance
- £12,571 – £50,270 – 20% Basic Rate tax
- £50,271 – £125,140 – 40% Higher Rate tax
- £125,141+ – 45% Additional Rate tax
Tip: You only pay tax on your profits, not your total income. Make sure to deduct all allowable business expenses before calculating your tax bill.
National Insurance: Don’t forget this!
Self-employed people need to pay National Insurance (NI), which is separate from Income Tax.
The two main types are:
- Class 2 NI – If you earn more than £6,725 per year, you pay £3.45 per week.
- Class 4 NI – If your profits are over £12,570, you pay 8% on earnings up to £50,270 and 2% on anything above that.
Many self-employed people forget about NI when setting aside money for tax – don’t get caught out!
Do you need to pay VAT?
If your turnover exceeds £90,000 per year, you must register for Value Added Tax (VAT).
This means:
- You charge 20% VAT on sales (unless selling VAT-exempt products/services).
- You must file VAT returns—usually quarterly.
- You can reclaim VAT on business expenses.
Not sure whether VAT applies to you? Speak to an accountant before your turnover reaches the threshold.
Tax Deductions & Expenses: Reduce your tax bill
As a self-employed individual, you can claim back business expenses to reduce your taxable profit.
Common deductible expenses include:
- Office costs (rent, utilities, internet, software)
- Travel expenses (fuel, train tickets, business mileage)
- Professional fees (accountants, legal fees)
- Marketing and advertising costs
- Equipment and tools necessary for your business
Keeping detailed records and receipts will help you maximise your deductions and pay less tax legally.
How to stay on top of tax payments
Since no tax is deducted from your income automatically, you need to plan ahead:
- Set Aside 25-30% of your earnings for tax & NI.
- File a Self-Assessment Tax Return each year (deadline: 31st January).
- Make Payments on Account (advance tax payments due in January and July).
- Use Accounting Software to track income & expenses automatically.
Tip: Consider opening a separate savings account and transferring your tax money every month. This avoids the panic when tax deadlines approach!
Don’t let tax be an afterthought
Many self-employed individuals underestimate their tax bill and end up struggling to pay it. Planning ahead, keeping records, and working with an accountant can help you stay tax-efficient and avoid unexpected surprises.
Need help with tax planning? We specialise in helping self-employed business owners save money, stay compliant, and maximise their profits. Get in touch today!
