Self-employed tax rates: what to know about income tax

This means you need to record your earnings and let HMRC know what you owe in an annual tax return.

You can also deduct business expenses to pay less tax, which means the self-employed pay income tax on trading profits rather than total income.

Keep in mind that you’ll also need to pay National Insurance through your Self Assessment, too. While National Insurance increased by 1.25 percentage points from July to November 2022, that policy has now been reversed.

What are the income tax bands?

Self-employed tax rates are the same as tax rates for employees.

Most people get a standard tax-free personal allowance, with income tax rates, bands, and thresholds applying to everybody.

Your income tax personal allowance changes if your adjusted net income (income before any personal allowances and less certain tax reliefs) is above £100,000. It goes down by £1 for every £2 above £100,000.

You don’t pay a single income tax rate on your trading profits. Instead, you pay the appropriate rate on your trading profits within each bracket.

For example, if you’re filling out your next Self Assessment in January 2023 and your trading profits were £50,500 in 2021-22, you pay:

• no income tax on £12,570 of your trading profits
• 20 per cent on the next £37,700
• 40 per cent on £230

Income tax rates and bands 2022-23

Income tax rates and bands for 2021-22 were the same as 2022-23.

Here’s an example of how your personal allowance decreases above £100,000:

• you need to pay tax on £110,000 of earnings
• you pay the higher rate (40 per cent) on £10,000 (£4,000)
• you also pay the higher rate (40 per cent) on your £5,000 lost personal allowance (£2,000)

Were there income tax changes at the Autumn Statement 2023?

Significant changes for income tax were announced as part of the Autumn Statement.

The personal allowance has been frozen at £12,570 until 2028 (extended from 2026).

This could lead to a higher tax bill if your earnings increase (for example, if you grow your business or make more money as a result of rising prices).

In previous years, the personal allowance threshold rose in line with increasing earnings. But when it’s frozen, you’ll pay tax on more of your money.

The additional rate threshold will also reduce to £125,140 in April 2023, meaning that more people will be pushed into paying the 45 per cent rate.

How to reduce income tax if you’re self-employed

As mentioned, you don’t pay income tax on total income. Instead, you can deduct a number of allowable business expenses to calculate your total trading profits. This means that it’s important to record and deduct all of your allowable expenses to pay the right amount in tax.

Generally, you can claim expenses that are wholly and exclusively for business purposes – for example, accounting, business insurance, a business phone, and so on.

You can read more about reducing income tax by claiming expenses in our guide to allowable expenses for the self-employed.

There’s also lots of HMRC guidance about business expenses and you should check whether there’s any information from trade bodies specific to your industry.

How is self-employed income tax calculated?

This is an example self-employed tax calculation for 2021-22 if someone has:

• no income from employment through PAYE
• £58,000 in self-employed income
• £5,000 in business expenses

These rates and allowances are based on current frozen income tax rates and thresholds (assuming a personal allowance of £12,570). This tax calculation includes income tax and self-employed National Insurance:

• £7,540 (20 per cent) on self-employment income between £12,570 and £50,270
• £1,092 (40 per cent) on self-employment income between £50,270 and £53,000 (£58,000 less £5,000 business expenses)
• Class 2 National Insurance at £159
• Class 4 National Insurance at nine per cent on £40,702 – which is £3,663
• Class 4 National Insurance at two per cent on the remainder of income – which is £55

This comes to a total income tax and National Insurance bill of £12,509.

The self-employed person makes £40,491 after tax and expenses. This calculation was completed using a calculator from Tax Scouts.

The example above is just an illustration and your personal circumstances will be different. If you’re not sure, speak to a professional to help with your calculations.

Filing an income tax return when you’re self-employed

You need to complete an annual Self Assessment tax return by 31 January each year (it’s earlier if you file on paper, but HMRC is gradually making their entire tax system digital). You’ll also need to pay any tax due by 31 January.

You register for Self Assessment when you first go self-employed. There are penalties for doing this late, so make sure that you register promptly.

You’ll receive a notice to file each year. You can file your return at any point from then – there’s no reason to leave it until the last minute. Most people file their Self Assessment tax return online. You’ll need a Government Gateway login if you haven't got one yet, so get this sorted as soon as possible.

When you log in to file your return, you’ll need to answer a series of questions about the nature of your business, any other income you’ve received (including foreign income), and your expenses and income. You can choose to write expenses as a single figure, or if your accounts are more complicated, you can break them down.

A successful tax return relies on meticulous record keeping throughout the tax year. You need to keep track of invoices and receipts, and make sure that they’re properly filed. Most self-employed people use bookkeeping and accounting software to help them do this.

If you aren't sure about income tax or filing your tax return, it's a good idea to get help from a qualified professional.

Read more about your Self Assessment tax return in our comprehensive guide.

How do you pay self-employed income tax?

Employees pay tax automatically through PAYE, but self-employed people need to pay after filing their Self Assessment tax return. This also applies to company directors. HMRC should calculate your tax bill for you.

If you're struggling to pay your tax bill, don’t put off speaking to HMRC. They might be able to work out a payment plan for you to pay your bill in instalments – this is called a Time to Pay arrangement.

But if you can pay your tax bill by 31 January, you should. HMRC will charge you interest on late payments, so a payment plan will end up costing you more in the long run.

You should also remember payment on account. Under this system, you pay 50 per cent of your last tax bill towards your next year’s liability. There's also a payment on account due in July. Payments on account can be a surprise in your first year, but it’s important that you budget for them.

Read more about income tax for the self-employed:

• Self Assessment and tax: our guides and resources
• How to set up an HMRC personal tax account
• How to register as self-employed
• Learn more about insurance for the self-employed