Starting your own business is an exciting step, but it comes with many new responsibilities. One of the most important things to understand is your new tax and National Insurance obligations. Unlike employed individuals, whose salaries are taxed at source by their employers, self-employed people are responsible for reporting, calculating and paying their own taxes.
Self-employed individuals must file annual tax returns with HMRC that show their profits and expenses. They pay tax twice a year, in January and July. The amount of tax payable depends on the level of profits.
In this guide, we’ll walk you through the essentials of self-employed taxes: when you need to register with HMRC, what taxes apply, and how much tax you’ll need to pay. Understanding these basics can help you avoid surprises and manage your finances more effectively so you can run your new business with confidence.
For personalised advice on tax and accounting for self-employment, please contact Butt Miller.
Do I need to register as self-employed straight away?
As long as you have registered your self-employment by 5 October after your first tax year ends, there is no particular hurry to register for income tax and National Insurance.
However, you may be required to register with HMRC earlier if your revenue is above the VAT threshold, you have employees, or you work in a sector where the government requires worker registration.
How much can you earn before you have to register as self-employed?
HMRC will expect you to register as self-employed if you earn more than £1,000 before expenses in a tax year. You will then be required to submit an annual self-assessment tax return. However, you will only start paying tax on your earnings once they exceed your personal allowance (£12,570).
Does HMRC know how much I earn as a self-employed person?
HMRC relies on business owners to report their profits and expenses. However, they obtain information from many sources that could indicate your earnings, e.g., payments you have made to other businesses. It’s difficult to know how much information they hold.
To ensure compliance and avoid penalties, it’s essential to keep detailed records of your earnings and outgoings and prepare an accurate tax return each year.
What types of tax do the self-employed pay?
Self-employed people encounter different types of tax. Income tax is, of course, the main liability, but there is also National Insurance (NI) and potentially VAT. The tax and NI you owe must be reported to HMRC via an annual self-assessment return.
We’ll concentrate on income tax and National Insurance contributions for the sake of this article. See our guide on how and when to pay VAT here, as well as our guide to Capital Gains tax.
Income tax
How much income tax you pay depends on your total taxable income, which includes your company profits (after expenses) and any other forms of income, like rental income or interest on savings and investments. Most self-employed sole traders pay tax in two instalments: in January and July each year.
Tax is charged based on income bands ranging from 20% to 45%. The tax-free allowance for a year is currently £12,570, meaning that you only pay income tax on earnings above this amount. See the latest income tax bands here.
National Insurance contributions
For the self-employed, there are two types of National Insurance (NI) contributions to be aware of:
Class 2 NI Contributions: These are flat-rate contributions that apply for every week you’re self-employed. Though these are gradually being phased out, they have traditionally been collected along with your income tax.
Class 4 NI Contributions: These are based on your profits, meaning how much National Insurance you owe depends on your level of earnings.
If you also have income from employment during the same tax year, your employer will deduct Class 1 National Insurance from your wages. Depending on your total income, there may be a reduction in the self-employed contributions you need to pay to account for NI already collected through employment.
All the information required to calculate your National Insurance obligations should be included in your annual self-assessment return.
Do you pay income tax on first-year self-employed?
Yes, income tax starts accruing from the day you become self-employed. However, you won’t need to file your tax return with HMRC until after the end of the tax year.
This means that while you’re responsible for paying tax on any earnings from your first year, the actual filing and payment deadlines come after the tax year has ended, giving you time to prepare.
How to report your self-employment income
As a self-employed business owner, you must prepare accounts at the end of the tax year, which summarise income earned minus the costs incurred in relation to your business. For very small businesses, a simple spreadsheet might suffice, but larger businesses should invest in accounting software to produce the detail needed to assess their total earnings.
This information is used to complete a self-assessment tax return in one of two ways: an online submission, due by 31 January following the end of the tax year, or a paper submission, which must be received by HMRC by 31 October.
Need help with your new business accounts? Get in touch
Understanding self-employed tax rules early on is essential to running your business. By getting a clear picture of when to pay income tax and how much you owe, you can avoid unexpected costs and stay in control of your finances. This knowledge helps you plan ahead, manage cash flow effectively, and make informed business decisions.
If you are starting a new self-employed venture, Butt Miller is here to help you every step of the way. We can help you decide on the right business structure, as it may be more beneficial to set up as a limited company from the outset. Once you are up and running, we can also provide services like bookkeeping, VAT and payroll.
For business and accounting advice, reach out to us today.
