Self-employed tax: a guide to income tax and National Insurance

If you’re newly self-employed or thinking it’s time that you set up on your own, you’ll need to know how self-employed tax works and when you need to pay it to avoid a fine from HMRC.

Taking the plunge into self-employment can be a scary decision to make – and that’s before you think about handling your own taxes.

Telegraph Money is on hand to detail the ins and outs of what you need to know.

What taxes do self-employed people have to pay?

A freelancer, sole trader or a partnership pays income tax on profits. Before working out how much tax you must pay, you can deduct certain costs that you’ve incurred during the course of your work – these are called allowable expenses and include:

• Travel such as fuel, taxi and train fares.
• Office costs including phone bills and stationery.
• Costs of running your business premises.
• A proportion of costs incurred by working from home such as your energy and broadband bills.
• Clothing costs for uniforms, but not for office wear

You’ll also make National Insurance contributions (NICs), which help you build up an entitlement to benefits such as your state pension.

If you operate from commercial premises, you may have to pay business rates. When working from home, if only a small portion of your property is used for your work, you do not have to pay business rates.

If you are self-employed and operate through a limited company, then you pay corporation tax on your profits instead of income tax.

National insurance if you’re self-employed

Just like employed workers, if you’re self-employed and earning more than £6,725 a year in taxable profit, you must pay National Insurance contributions. NICs are used to fund the state pension and other benefits as well as contribute to the NHS.

These are paid through your self-assessment tax return. The Government recently made changes to the rates and structure which took effect from April 6 2024.

There are two types of NICs which apply to the self-employed, however only one class is mandatory.

This is class four, which dropped in 2024 from 9pc to 6pc for trading profits between £12,570 and £50,269. For profits of £50, 270 or more a rate of 2pc is charged.

Since the changes took effect, the class two charge has been abolished. However those earning £6,725 or less can choose to make voluntary class 2 contributions to build up their NICs record so that they qualify for the full state pension.

Self-employed tax rates

There are four different tax rates. You could have multiple tax rates applied to your profit to calculate your tax bill if your profits span more than one tax band.

For example, if you earned £60,000 in taxable profit, three tax rates would be applied to your profit – a 0pc tax rate would be applied to the first £12,570; on the next £37,700 a basic rate of 20pc is applied, followed by a 40pc higher rate which is applied to the final £9,730.

How much can I earn self-employed tax-free?

You can earn up to £12,570 self-employed tax free. Tax is paid on your remaining taxable profit after your personal allowance has been deducted.

Additional rate taxpayers do not receive a tax-free allowance.

The tax band thresholds for sole traders, freelancers and partnerships are the same as those applied to employed workers. If your expenses are below £1,000, then you can claim an additional £1,000 allowance tax free.

Calculator

To calculate how much your self-employed tax bill is you can use HMRC’s self-employed income tax calculator. To find out how much National Insurance you’re paying, head to our National Insurance calculator.

How to register for self-assessment

You can register online to complete your self-assessment. You must register if you expect to earn more than £1,000 in the tax year. A tax year runs from April 6 to April 5.

The deadline for you to register is October 5 in the tax year following the one in which you set up your business. So if you set up your business in August 2025, which falls within the 2025-26 tax year, you must register by October 5 2026 which lands in the tax year 2026-27.

Registering is a simple process which can be followed in these steps:

1. You will need to register with HMRC first, and this can be done online. You will first be sent a 10-digit unique taxpayer reference (UTR) in the post.

2. With your UTR, you can then log on to the Government Gateway which is the portal you enter to complete your self-assessment tax return.

3. Make sure you have all of your personal details to hand, such as your National Insurance number, details and receipts of any expenses, a comprehensive breakdown of all sources of income you have earned and details of any interest your bank has paid you. Our guide on how to complete a tax return lists everything you’ll need.

4. Complete your tax return. It is important to take time and care when completing your return, as even small mistakes can lead to you paying too much or too little in tax.

What if I have another job?

It’s OK to be employed and self-employed at the same time, just make sure HMRC is aware of your dual status. The tax you pay is based on your combined earnings but it is worked out in two different ways.

For your employed work, your employer will deduct your tax and National Insurance from your total earnings before paying you.

For your self-employed business, you must pay your own tax on profits after expenses (not your total earnings) through the self-assessment system.

Declare to HMRC that you have an employed job. You’ll also be asked on your tax return about income from other sources. Your employer will provide you with a form including a reference number which you will enter into your tax return.

Your personal allowance usually only applies to one of your jobs, which is usually the one in which you earn the most.

Rachael Griffin, tax and financial planning expert at Quilter, explained: “If, for example, you were earning £30,000 a year from your employment and also earned £20,000 taxable profit on your self-employed earnings, you would potentially have to pay the basic rate of tax on all these self-employed earnings.

“However, as a self-employed person you may be entitled to deduct expenses such as office and travel costs which can lower this tax bill.”

What if I’ve registered as a limited company?

Self-employed business owners who have registered as a limited company pay corporation tax on their taxable profits instead of income tax.

On profits below £50,000, companies pay a small profits rate of 19pc. Companies with profits above £250,000 pay the main rate of 25pc. Those with profits falling in between these ranges pay tax at 25pc reduced by a marginal relief.

You must register to pay corporation tax within three months of starting to trade, and list your company on Companies House. You can also register for PAYE as an employer at the same time if you plan to take on staff.

Limited company owners must file a corporation tax return and file accounts to Companies House once a year.

It’s likely that you’ll complete a self-assessment tax return, too. A limited company is a separate legal entity from the owner, so by completing the corporation tax return you are declaring what profit the company made.

Any money you have earned from the company, such as dividends, must be declared on your self-assessment tax return.

FAQs

Am I self-employed for tax reasons?

Working out if you’re self-employed for tax reasons is not as clear cut as it sounds.

If you run your own business working as a sole trader or freelancer, then in the eyes of HMRC you are self-employed and must register to pay your own tax through the self-assessment system.

When working for an employer full time or part-time, they collect your tax and National Insurance directly from your pay packet, known as Pay As You Earn (PAYE).

While that seems straightforward, there is a grey area. For example, if you have a contract with a company to supply your services. Depending on the circumstances of that work and details of the contract, you could be classed as employed or self-employed.

If you’re required to turn up to work at a certain time, work at their premises and work under supervision you may be classed as employed for tax purposes.

You can use HMRC’s tool to establish if you are employed or self-employed for tax reasons.

How soon after becoming self-employed I need to register?

The deadline for you to register is October 5 in the tax year following the one in which you set up your business, so you have some leeway.