When you are self employed you need to pay Income Tax as well as Class 2 and Class 4 National Insurance.

The amount of tax and national insurance you pay is based on the amount of self employment profits you make (all your income less allowable expenses). It is your responsibility to work out your self employment profits, the amount of tax & national insurance you need to pay and submit this to HMRC on a self assessment tax return.

How Much Tax Do You Pay On Your Self Employment Income

The amount of tax you pay is based not just on the amount of profit you make being self employed, but the amount you earn from all your sources of income. For example you may be a self employed hairdresser but also rent out a property – in which case the amount of tax you pay would be based on the total you earn from hairdressing and renting out your property.

The 2018/2019 tax rates are:
Personal Allowance
Up to £11,850
Up to £11,500
Basic rate
£11,851 to £46,350
£11,501 to £45,000
Higher rate
£46,351 to £150,000
£45,001 to £150,000
Additional rate
over £150,000
 over £150,000

The personal allowance for those earning between £100,000 – £122,000 disappears. You will lose £1 of Personal Allowance for every £2 of Income between this threshold and an estimate for this is reflected in above calculations, meaning there is no personal allowance available for those with earnings above £122,000

How Much National Insurance Do You Pay On Your Self Employment Income

Class 2 and Class 4 national insurance are only payable on self employment profits not other forms of income like rental income or bank interest.

The amount of Class 2 and Class 4 national insurance you pay is based on your self employment earnings (or profit).

The 2018/2019 National Insurance Rates are:
Rates for tax year 2018/2019
Rates for tax year 2017/2018
Class 2
£2.95 a week
On taxable profits above £6,205
£2.85 a week
On taxable profits above £6,025
Class 4
9% on profits between £8,425 and £45,000
2% on profits over £46,350
9% on profits between £8,164 and £45,000
2% on profits over £45,000

An Example of Working Out Tax and National Insurance When You’re Self Employed

Molly is a self employed food blogger but also has a part time job earning £15,000 per year, so has paid tax of £800 through payroll.  She is getting ready to submit her tax return for the tax year 2016/2017 which is due by 31 January 2018.  She has worked out that her profit from her Body Shop at Home business was £22,000 therefore she will need to pay tax of £4,400.

In our example above, Molly earned £22,000 therefore would need to pay Class 2 National Insurance of £145.60 and Class 4 National Insurance of £1,254.60.

Molly’s total tax bill is therefore:

  • Income tax £4,400.00
  • Class 2 National Insurance £145.60
  • Class 4 National Insurance £1,254.60
  • Total for 2016/2017 £5,800.20
  • Payment on Account £2,827.30
  • Total to pay by 31 January 2018 £8,627.50

In our example Molly would need to complete the self employment section AND employment section of her Self Assessment Tax Return.  She would need to disclose what she earned in her job which will be on her P60 provided to her by her employer.

What About VAT? VAT can affect the self employed, find out whether you need to be registered for VAT here.

Anita is a Chartered Accountant, turned blogger and creator of the ever popular free Go Self Employed Email Mini Course, which has been completed by hundreds of attendees all over the UK. Using her 10 years experience in accounting, tax and operations for Small Businesses, Anita is on a mission to make finance simple for the self employed, so they can stop stressing about tax & finances and focus on building profitable businesses which will give them the lifestyle they dream of.