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When to start paying tax when you go self-employed

  • 3 min read
  • 27 Jan 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 2022/23 tax year, you calculate what you owe between 6th April 2022 to 5th April 2023. 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. 

Your situation

Outlined number oneOutlined number one
I am
Annual self-employed income
Self-employed expenses
?

Tax and profit

Outlined number two
  • Total earnings
    £50,000
    £1,000 tax-free Trading Allowance
    ?
  • Tax to pay
    £10,994
    £7,286 income tax
    £159 class 2 National Insurance
    £3,549 class 4 National Insurance
  • What you’re left with
    £39,006

How your income tax is calculated

When you’re self-employed, you have to pay your income tax and national insurance contributions yourself in your annual Self Assessment. Our calculator helps you quickly assess how much you owe.

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 less than planned
  2. You have done things that qualify for a tax relief (made private pension contributions, given to charity, etc.)

In your case when you earn £50,000:

Income tax breakdown

You pay no income tax on first £12,570 that you make

You pay £7,286 at basic income tax rate (20%) on the next £36,430

National insurance contributions breakdown

No contributions on the first £9,568 that you make

You pay £3,549 in contributions (at 9%) on the next £39,432 that you make

You pay £159 in NI Class 2 contributions

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 2022
  • You’re earning in the 2022/23 tax year
  • The deadline for your first tax bill is 31st January 2024
  • On 31st January 2023, 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 2022/23 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 £6,725No contribution£0
over £6,725Class 2£3.15 each week
over £12,570Class 410.25%
over £50,270Class 43.25%

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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