How income tax works for the self-employed

It is worth finding out if you meet HMRC’s self-employment status by using their eligibility calculator.

This will suggest whether you need to register as self-employed, but isn’t a definitive answer.

Always check HMRC’s guidance if you are unsure.

If you have become self-employed in a tax year (before 5 April) you must inform HMRC by the 5 October after.

eg: you became self-employed in February 2020 (tax year would be 19/20) let them know by 5 Oct 20.

Self-employed profits are taxed

As a self-employed individual you will pay taxes on your profits for the year, not your income for the year.

You can calculate this by deducting your business expenses from your income.

Self-employed tax rates

Your tax rates will be the same as everyone else. It is worth checking the tax-free allowances you can receive and what these rates are here.

Self-employed national insurance rates

Self-employed national insurance is different to that of the employed. This is because there are 2 classes of National Insurance that may be relevant:

Class 2 National Insurance for the self-employed

Class 2 National Insurance only impacts self-employed people and as of 6 April 2025 is only voluntarily payable, meaning you do not have to pay this if you do not wish to.

Why would you pay Class 2 National Insurance?

If your profits are below £6,725 you do not need to pay any national insurance, but you may wish to pay Class 2 NIC at £3.45 (or £179.40 per year) to protect your national insurance record. This might be of interest if you do not have many “qualifying” state pension years.

Class 4 National Insurance for the self-employed

Unlike Class 2 NIC, Class 4 NIC is not voluntary and is payable on any self-employed profits of £12,570 or more.

Class 4 National Insurance is tiered like it is for employed individuals and the rates are as follows:

Earnings between £12,571 - £50,270 = 6%

Earnings above £50,270 = 2%

Example

Say you make a profit of £55,000 for the tax year 2024/25

Tax:

Tax-free personal allowance: £12,570 so £Nil

Basic Rate at 20%: £37,700 so £7,540

Higher Rate at 40%: £4,730 so £1,892

National Insurance:

Class 2: £Nil as technically not payable

Class 4 at 6%: £37,700 x 6% = £2,262

Class 4 at 2%: £4,730 x 2% = £94.60

Total tax liability would be: £9,432

Total NIC liability would be £2,356.60

How do I pay self-employment taxes?

As your taxes aren’t dealt with through PAYE like most employed individuals you will need to submit a tax return through self-assessment.

These are based on your income for a tax year (6 April - 5 April) and must be submitted and paid by 31 January following the 5 April.

If you are unsure on how to prepare or submit your tax return you should seek advice from an accountant or professional tax adviser.

Did we miss anything you want to know?

If you need more information or need guidance from an accountant or tax adviser please get in touch.

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