Self Employed Tax
You're self-employed - hurrah!
Becoming self-employed can be really exciting! You finally get to be your own boss, decide which hours you work, and follow your passions.
But despite all the freedoms it allows you, one of the big downsides of being self-employed is having to deal with self-employed tax. And in fact, it’s not just income tax that you have to deal with, it’s tax and national insurance contributions that you’ll be required to get your head around. Oh, and you’ll have to submit a tax return too. (and from 2024 that goes up to at least 5 tax returns per year due to HMRC and the Making Tax Digital scheme).
How do I calculate my self employed tax?
There are plenty of self-employed tax calculators out on the internet, but none of them take into account the calculation of your taxable profits. Most of them will ask what your taxable profits are, and then perform an income tax and national insurance calculation based on that, but how do you know what your true profits are from your self-employed income?
In truth, unless you are an accountant or have an accountancy qualification, it’s unlikely that you’ll be able to accurately calculate your self-employed tax bill. Don’t forget, accountants spend many years training and have years of experience in working out people’s tax bills from their self-employment income – you’re being unfair to yourself if you think that you should be able to wrap your head around it too! Give yourself a break!
How do you save tax?
How to save tax is one of the most common questions we get asked, and while it’s important to make sure that you’re as tax efficient as possible, we think it’s more important that you get yourself into a position of something we call Tax Readiness.
What on earth is Tax Readiness?
Tax Readiness is a scoring system that we have developed to ascertain whether you are in the best possible position tax-wise. Whether you are operating as a small business or a sole trader, knowing about your Tax Readiness is vital.
That doesn’t just mean knowing what your income tax and national insurance contributions will be, or when to pay them. And it doesn’t just mean checking that you are ready to file a self-assessment tax return so you can pay tax over to HMRC.
What does Tax Readiness consider?
Our Tax Readiness metric looks at a few things:
- Your legal structure for your business
- Your record-keeping
- Your knowledge of current tax schemes and rules
- Your use of advisors
- Your confidence in your tax position
More than just saving tax
We find that instead of just telling our clients how to save tax, it’s much better to work holistically with them to make sure that their business is meeting their needs. Yes, that can mean saving tax – let’s face it, no one wants to pay more income tax and national insurance than they really need to!
But it can also mean assessing your risk of investigation by HMRC, or looking at your self-employed income and aligning it to your personal goals for the next couple of years (buying a house, going on holiday etc).
If we can understand your Tax Readiness, we can make suggestions to make your self-employment so much more enjoyable, without all the stress of tax on top of running a small business.
So if you’re ready to find out your score – just do our quick quiz and you’ll be able to take your first steps to a happier self-employment!
Take the test now for free
Self-Employed Tax FAQs
What is self-employed income?
Self employed income is income that has not been taxed at source (unlike employed income), and that has been generated through your self-employed activities as a freelancer or small business.
What taxes do I need to pay?
As part of your self-employment, you’ll need to pay income tax and national insurance. National insurance contributions are paid in two ways, via Class 2 and Class 4 national insurance. Both class 2 and class 4 are calculated at the end of the year. Class 2 is a fixed amount whereas class 4 is based on your taxable profits.
What do I need to submit to HMRC?
In order to pay income tax, you’ll need to submit a tax return to HMRC once a year. However, from 2024 everyone who earns more than £10,000 through self-employment or as a landlord will need to submit tax returns to HMRC a minimum of 5 times per year. This change is the biggest change to the self-assessment tax return in a generation and is completely overhauling the income tax filing rules. These changes fall under the HMRC scheme called Making Tax Digital – designed to give HMRC better reporting on income tax for small businesses and the self-employed. There will be four submissions to HMRC across the year, and then a final submission which will be similar to the current self-assessment tax return.
Do I need an Accountant?
Dealing with your self-employment income can be a huge burden for a small business. It’s not just filing the tax return that’s a drain on your time and energy, it’s knowing what is and isn’t allowable for income tax, understanding what to pay and when, and making sure that through all of the admin, you’re earning enough money for yourself, as well as putting enough money aside for your income tax bill.
That’s we say that having an accountant is money well spent as a small business. Let them figure out when you need to pay tax, and what your tax bill will be, while you get on with running your business.
More often than not, having an accountant will cost you less money than your equivalent hourly rate for doing the tax work yourself, and they’ll undoubtedly save you money on your tax bill to boot.