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When to start paying tax when you go self-employed

27th January 2021

when to start paying tax if you're self-employed

When you go self-employed, tax is a major point of confusion. Whether you’re a COVID mask maker, an exotic dancer, a professional footballer, a landlord, a consultant, a trader, or anything else, almost all of us get stuck when it comes to our tax liabilities. 

Three big questions are:

  1. When should I calculate tax from?
  2. When do I owe it? 
  3. What tax do I pay? 

And because we’re TaxScouts, we’ve written this article to answer all of those questions for you right here, right now. 

When do I calculate from?

The tax that you owe is based on what you earn over a 12 month period. The period that most people use is the tax year – 6th April to 5th April in any given two year period – but you are allowed to choose your own basis period. That said, we’d recommend sticking with the tax year unless there’s a specific reason that you want to use a different one. Why make it more complicated, right?

In the 2020/21 tax year, you calculate what you owe between 6th April 2020 to 5th April 2021. Any business spending during this period can be deducted from your total. 

When it comes to recording your income, it’s worthwhile creating spreadsheets for each tax year. You can split them into monthly tabs and record both your income and expenses. That will help when it comes to the dreaded tax return time. That way, you won’t have to scramble with a highlighter and bank statement at the 11th hour. 

What you earn in each tax year is what will be totaled and taxed. Use our calculator to work out how much you might owe. 

Annual self-employment income
£
Self-employment expenses
£
Select tax year
Income after tax
£37,986
Income tax
£7,300
NI
£3,714
Total income tax
£7,300
£12,500 taxed at 0%
£36,500 taxed at 20% : £7,300
Total NI contributions
£3,714
Class 2 NI: £159
Class 4 NI at 9% : £3,555
What you’re left with
£37,986

Hey there! We really hope this calculator helped you. Tax matters can be a dreadful topic at times. We know. That’s why we started TaxScouts.
A stress-free way to getting your taxes done.

Have a minute? See how it works

How your income tax is calculated

As a self-employed you have to pay your income tax and national insurance contributions yourself during your annual self assessment. Our calculator helps you quickly assess how much payment is due.

However you may be eligible for a tax refund when:

  1. You already made tax payments for the year but your annual income ended up smaller than planned
  2. You have done things that qualify for tax relief (made private pension contributions, give to charity, etc)

In your case when you earn £49,000:

Income tax breakdown

You pay no income tax on first £12,500 that you make

You pay £7,300 at basic income tax rate (20%) on the next £36,500

When do I owe tax?

Here’s another mind bender. You’re probably aware of the 31st January tax return deadline. But in what year are you first liable to pay? You might be surprised to learn that you don’t owe tax until nine months after the tax year that you worked in ends. 

EXAMPLE:

  • You start self-employed work in July 2020
  • You’re earning in the 2020/21 tax year
  • The deadline for your first tax bill is 31st January 2022
  • On 31st January 2021, you will not owe tax

For anyone who started working freelance (or earning untaxed income) later than 6th April 2020, you don’t need to do a tax return until 2022. 

As if it weren’t already complicated with the April to April year?!

What tax do I pay?

This all depends how much you earn. When you’re self-employed, there are two types of tax that you might be liable to pay:

  1. National Insurance – which makes you eligible to claim certain state provided benefits such as the state pension or disability benefits
  2. Income Tax – which is the tax we all owe on our wages over a certain threshold

In the 2020/21 tax year, you’ll be charged at the below rates for both. But be aware that these can change from year to year.

IncomeTax rate
Up to £12,5700%Personal allowance
£12,571 to £50,27020%Basic rate
£50,271 to £150,00040%Higher rate
over £150,00045%Additional rate
Self-employment profitsClass of National InsuranceHow much do I pay?
under £6,515No contribution£0
over £6,515Class 2£3.05 each week
between £9,568 and £50,270Class 49%
over £50,270Class 42%

If you have any more questions about how or when to file your tax return, don’t hesitate to give our support team a buzz. You can catch them on [email protected]

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