Self-employed? Your tax obligations explained

Do I need to register as self-employed?

In the UK, if you’re self-employed, you may need to register as a sole trader.

You’ll need to register as a sole trader if you:

• Run your own business as an individual
• Earn more than £1,000 in a single tax year from self-employment
• You need to prove you’re self-employed, for example to claim tax-free childcare
• You want to make voluntary class 2 national insurance payments

Registering as a sole trader means you’ll need to make sure you:

• Keep a record of your expenses and business accounts
• File a Self-Assessment tax return each year
• Pay Income Tax on your profits
• Pay Class 2 and 4 National Insurance (depending on your profits)
• Register for VAT if your turnover exceeds £85,000 (you can choose to do this anyway if it suits your business)

If you work in the construction industry as a subcontractor or contractor, you’ll need to register for the Construction Industry Scheme (CIS).

You can use the Gov.UK website to register as a sole trader or for the CIS.

What happens if I don't register as self-employed?

When working for yourself, you must ensure you follow all the tax and national insurance requirements.

You must register as a sole trader by the 5th of October in your business’s second tax year. So, for example, if you started trading in May 2021, you’d need to have registered as a sole trader by the 5th of October 2022.

You can be fined if you don’t register as a sole trader when you need to.

What tax do I pay if I'm self-employed?

If you’re self employed or a sole trader, you’ll need to file a self-assessment tax return every year. You’re responsible for keeping track of your finances and records in order to work out how much tax you need to pay.

Just like those in employment, sole traders and self-employed people need to pay income tax and national insurance, the only difference is these taxes are based on profits, rather than wages.

You may also need to register for VAT, if your business is turning over more than £85,000 annually. It can be a good idea to register for VAT if your business is dealing with other VAT registered businesses.

If you do register for VAT, you’ll need to send VAT returns quarterly.

There may also be instances where you’ll need to pay capital gains tax, for example if you sell any land or buildings.

If you’re running a limited company or a LLP (Limited Liability Partnership) you’ll also need to pay corporation tax.

Do I pay taxes in my first year of self-employment?

When you first start your self-employed business, it might be a while before you start paying taxes, but it’s important to not fall into the trap of thinking you don’t pay tax in that year.

Your self assessment tax return will be due by the 31st of January in the tax year following the year you started your business.

So for example, if you started your business in June 2021, you’ll need to pay your tax in January 2023. Remember you’ll be paying tax on any profit for the whole previous tax year, so it’s important to budget for it.

How much can I earn before paying tax when Im self-employed?

Self-employed people are entitled to the same tax-free personal allowance as those who are in employed. Your personal allowance is the amount you can earn before you need to start paying tax.

For the tax year which runs from April 6th 2023 to April 5th 2024, the personal allowance is £12,570.

If you’re a sole trader you will also have to pay National Insurance (NI), depending on how much profit you make.

If your profits are over the small profits threshold, which is £6,725 in the current tax year, you’ll need to pay class 2 National Insurance contributions. Currently, this is £3.15 a week, £163.80 a year.

You can choose to voluntarily pay class 2 NI contributions even if you’re under the threshold. Some people choose to do this because certain benefits, such as the state pension are based on the contributions you’ve made.

If your profits are over £11,909 for the current tax year, you’ll also need to pay class 4 NI contributions. This is 9% on any profits between £11,909 and £50,270, and 2.73% on anything above this.

Do self-employed pay less tax?

Whilst some of the thresholds vary between the employed and self-employed, the amount of tax you’ll pay will work out pretty much the same.

The income tax band for people who are employed and self-employed are the same, as demonstrated in the tables below.

Tax bands for those in employment:

• Personal allowance (up to £12,570) - 0%
• Basic rate (£12,571 to £50,270) - 20%
• Higher rate (£50,271 to £125,140) - 40%
• Additional rate (over £125,140) - 45%

Income Tax on trading profits for self-employed & sole traders:

• Up to £12,570 - 0%
• £12,571 to £50,270 - 20%
• £50,271 to £125,140 - 40%
• Over £125,140 - 45%

Remember, you don’t pay the same level of income tax on all of your trading profits, only on the profits within that bracket, just like for those in employment.

For example, say your profits for the year were £65,000. The first £12,570 would be tax free, you would then pay 20% on the £37,700, which takes you to £50,270, and then you’d pay 40% on the remaining £14,730.

If you’re thinking about becoming self-employed, it’s important to make sure you stay on top of your accounts and finances.

Working for yourself can be extremely rewarding, but comes with a range of responsibilities, and doing your own bookkeeping is one of the big ones.

Tax for the self-employed is paid in arrears, in one potentially very large bill, so it’s crucial that you plan and budget accordingly.

If you think you don’t want to, or don’t think you’ll manage all the bookkeeping yourself, you could think about hiring an accountant. An accountant could help you with tax planning, as well as budgeting and offsetting your expenses against your income.