A guide to UK tax rates and thresholds when you're self-employed

A guide to UK tax bands and thresholds for the self-employed | Easy As VAT | UK financial coach for female business owners

When you're working for someone else, tax is an inconvenience which means you get to take home less money, but you don't really need to think about it much.

But when you're self-employed, it's important to educate yourself about tax, because you're responsible for paying the right amount yourself.

With that in mind, today I'm sharing some info you need to know about the different tax, National Insurance and student loan repayment thresholds, to help you work out how much tax you need to pay and prepare for your tax return.

These numbers usually change every April, so I'll update this post accordingly. The figures currently listed are for the 2018-19 tax year

Personal Allowance

Most people can earn up to £11,850 before having to pay any income tax. You will only pay tax on anything you earn over this amount. Yay!

This number can change if you claim marriage allowance, and will decrease if you earn over £100,00 a year.

Basic rate income tax

Once you've earned more than your Personal Allowance, you pay 20% tax on the amount you earn from £11,851 up to £46,350, also known as basic rate tax. This is the tax rate most people pay.

If you're self-employed, HMRC allow you to deduct certain business expenses from your total income, so you only pay tax on your profits rather than your total income.

Higher rate income tax

Once you start earning over £46,350, you enter the high rate tax band. You'll pay 40% tax on your profits from £46,351 up to £150,000.

Remember, you won't pay the 40% tax on all your earnings - just the amount that goes over the £46,350 threshold.

Additional rate income tax

If your profits are over £150,000, you'll pay 45% tax, also known as additional rate.

Class 2 National Insurance contributions (or "NICs")

But wait, there's more! As well as tax, you pay National Insurance contributions to qualify you for certain benefits, including a State Pension. The type of National Insurance you pay if you're self-employed is slight different to the type you pay when you're employed. National Insurance is calculated when you file your Self Assessment tax return.

The first type of self-employment National Insurance contributions are Class 2 NICs. These are paid at £2.95 a week (£153.40 a year) when your profit is £6,205 or more a year. 

If your profits are lower than £6,205, you may choose to pay Class 2 NICs voluntarily to avoid having gaps in your National Insurance record.

Class 4 National Insurance contributions

If your profits are £8,424 or more a year, you will also need to pay Class 4 NICS. You pay 9% on your profits between £8,424 and £46,350, and 2% on profits over £46,350.

Student loan repayments - Plan 1

If you started your degree before 1st September 2012 (or you're a Scottish or Northern Irish student), you'll be on "Plan 1" for your student loan repayments.

This means that you pay 9% on your profits over £18,330 towards your student loan.

Student loan repayments - Plan 2

If you were an English or Welsh student who started your degree after 1st September 2012 (AKA when the fees increased), you'll pay 9% on your profits over £25,000 towards your student loan.

Student loan repayments are also calculated when you file your tax return.

*breathes* and those are all the tax rates and thresholds you need to know if you're self-employed! This should help you to work out an estimate of how much tax you'll need to pay, so you aren't hit with a huge, unexpected tax bill! Let me know in the comments if you found this guide helpful.

I'm a financial coach helping female business owners to gain the knowledge and confidence they need to manage their finances successfully and have a positive relationship with money. If you're feeling stressed about tax or need help managing your business finances, click below to find out how I can help you.

I also create courses and resources to help you manage your business finances.