Finance · 21 January 2022

Everything You Need To Know About Tax If You’re Self-Employed

Self employed tax

When you’re self-employed, it’s essential that you know how to manage your own taxes. Unlike when you’re in employment, there’s no one to do it for you, so you need to stay on top of it to avoid hefty fines from HMRC. So, what are the self-employed taxes that you need to be aware of, and what is the best way to manage your taxes when you’re operating as a sole trader?

In this article, we’ll tell you everything you need to know about taxes as a self-employed individual, including registering as a sole trader, filing your tax returns and paying your taxes.

Do self-employed have to pay taxes?

If you are self-employed in the UK, you will typically be operating as a sole trader. You will need to register as a sole trader with HMRC and complete an annual self assessment tax return. From this, HMRC will calculate how much tax and National Insurance you are liable to pay. You will then need to pay this by the following January. This gives you nine months from the end of the self assessment period to pay your taxes.

However, if you earn under the personal allowance threshold which is set at £12,570 for the 2021/22 tax year, you will not be liable to pay any income tax, as this is your tax-free earning allowance. Your income tax will only be calculated on any earnings above this threshold.

But how much tax will you need to pay, and how do you register as self-employed with HMRC? Read on to find out.

How much tax do you pay if you are self-employed?

How much tax you’ll be liable to pay as a self-employed individual in the UK will depend on your level of income. Your income is calculated after expenses have been deducted, so it is only your business’ profits that are taken into account.

The UK has a marginal tax band system for taxing income. This means that different rates of income tax are used to pay for government spending at different levels of income. The UK’s current marginal tax bands for the 2021-22 tax year are:

  • Basic rate taxpayers earn between £12,570 and £50,270 a year and pay 20% on earnings over £12,570
  • Higher rate taxpayers earn between £50,271 and £150,000 a year and pay 40% on earnings over £50,000
  • Additional rate taxpayers earn over £150,000 a year and pay 45% on earnings above this threshold
It’s also important to note that individuals who earn over £125,140 do not get a tax free personal allowance, so they will have to pay tax on their entire earnings.

So, from these bands, you will be able to calculate how much tax you are liable to pay on your business profits.

For example, if your business turns over £10,000 of profit per year, you will not need to pay any income tax.

If your business turns over £30,000 profit in a year, you will not pay tax on the first £12,570 of your profits, but the remaining £17,430 will be taxed at the basic rate of 20%. This means that you’ll be liable to pay income tax of £3,486.

If your business turns over £60,000 profit in a year, you will fall into the higher rate tax band. This means that your first £12,570 will be tax free. The next £37,700 will be taxed at the basic 20% rate, resulting in £7,540 income tax. The final £9,730 of your earnings will be taxed at the higher rate of 40%, resulting in £3,892 income tax. This means that your total income tax bill on a profit of £60,000 would be £11,432.

How to register for self assessment

How to register for self assessment

If you have begun trading as a self-employed individual, you will need to register with HMRC as a sole trader for self assessment.

The process of registering as a sole trader is relatively straightforward. You can do this online, through the HMRC website, or by completing HMRC’s SA01 form.

As a sole trader, you are under a legal obligation to maintain accurate financial records for your business. This means keeping records of all of your business’ sales and expenses. You should save any receipts or invoices as evidence of these transactions.

You’ll also need to start sending a self assessment tax return to HMRC at the end of every financial year. The financial year runs from 6th April and ends on the following 5th April. Your tax return will need to be completed by the 31st January for the previous financial year.

As a self-employed individual operating as a sole trader, you’ll also be liable to pay income tax on any business profits, as well as Class 2 and Class 4 National Insurance contributions. This will need to be paid by 31st January, just under nine months after the end of the financial year.

So, the 2021-22 tax year will end on 5th April 2022, and your tax return will need to be completed by 31st January 2023. You’ll also need to have paid your income tax and National Insurance contributions in full by 31st January 2022. You can pay this in instalments, providing the full balance is cleared by this date.

Do self-employed people need to register for VAT?

Many self-employed individuals wonder whether they will need to register for VAT.

If your turnover is below the VAT registration threshold (£85,000 for 2021-22), you will not have to register for VAT. However, if your turnover exceeds this threshold and HMRC chooses to audit your personal tax return, you will need to provide evidence of a turnover below £85,000.

If your turnover exceeds this £85,000 threshold, you will need to register for VAT. You will then charge VAT to your customers and pass this onto Inland Revenue.

Do I need proof of self-employment for taxes?

As a sole trader, you will need to complete a self assessment tax return each year. From this tax return, your income tax and National Insurance payments will be calculated.

You do not need any proof of your self-employment to file your tax return, providing you are registered as a sole trader with HMRC. However, HMRC can choose to audit businesses, both on a random basis and if there are any suspicions that your tax return may not be accurate. For this reason, it’s essential that you keep accurate financial records, including invoices and receipts for any income and expenditure. This will help you to prove that your tax return is accurate, should HMRC choose to audit your business.

What qualifies as self employment income

What qualifies as self-employment income?

In general, any income that you receive in your capacity as a business owner will be classed as self-employment income. This can include:

  • Income from services that you provide to clients. This could include design work or consultancy services provided to another company in return for payment
  • Income from selling goods/products which you either make yourself or purchase and then sell on
  • Income from renting out property that you own