Self-Employed Tax Rate: A Brief Guide to Income Tax

Self-Employed Tax Rate: A Brief Guide to Income Tax

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Once registered, self-employed individuals are obliged to pay their income tax through Self-Assessment instead of the PAYE system. This article serves as their guide on computing self-employed income tax rate, determining what tax allowances they may be eligible for, familiarizing the income tax rates and bands for the previous and current tax years, and filing their income tax return.

Computing Self-Employed Income Tax

The amount that the self-employed pay for their income tax each year depends on these two—Personal Allowance and tax band. Any amount from their income that exceeds the yearly Personal Allowance (£12,500 for 2020/21 and £12,570 for 2021/22) will be taxed at either the basic rate and/or at the higher rate. These are further discussed with illustrations below.

In general, the income tax liability is calculated from the profits of self-employed income, and not from the total earnings made through this source. They can work out the profits and in turn get an idea of a provisional tax amount by the difference between their self-employed earnings and its costs covering the business operation and overheads.

Computing Self-Employed Income Tax

Self-employed individuals can make use of the HMRC’s computation tool on their website called “self-employed ready reckoner.” This reckoner has two options: one for the people residing in Scotland and another for the UK people residing in Northern Ireland, England, or Wales.

Regardless of their residency, they may find this tool provided by the HMRC most helpful. However, it may have its limits as well given that it can only work most accurately for those who are imposed with the standard Personal Allowance and have no other taxable incomes.

When their tax situation is more complex, such that they have tax obligations for the past fiscal years, amongst others, manual calculations would be more reliable in working out their provisional tax amount instead of using many other standard websites or calculator tools. Manual computations of tax bills, in many cases, provide the most accurate results.

Current Self-Employed Income Tax Allowances

The tax year 2021/22 began on 6 April 2021 and will end on 5 April 2022. Taxpayers will not be taxed against their income if it is within this year’s standard Personal Allowance, which is £12,570. The same tax-free limit applies just as much to the self-employed. Here’s how the standard Personal Allowance changed by each tax year, from 2018 to the present:
Tax Year Personal Allowance
2018/19
£11,850
2019/20
£12,500
2020/21
£12,500
2021/22
£12,570

Their Personal Allowance would differ if they claim other allowances, such as for Blind Person or for Marriage. If any of these allowances applies to them, their Personal Allowance is more likely to increase. But it may be reduced when their earnings exceed £100,000.

However, when their self-employed income exceeds £125,140, they may not be given a Personal Allowance, which means they get different tax rates and tax bands. For anyone born prior to 6 April 1948, a different threshold for Personal Allowance is imposed.

Kinds of Income Tax Allowances to Claim

To reduce tax obligations, the self-employed must make sure to claim other kinds of allowances they are eligible for, such as trading income allowance or property income allowance. If qualified, they can also claim both. Maximizing the use of these benefits can largely assist them with the costs of running their business.

Neither of these allowances are applied automatically as opposed to the Personal Allowance. If they’re eligible for any or both, they will have to claim for them first. Only then can they get an allowance of £1,000 each.

Kinds of Income Tax Allowances You May Claim

Self-employed individuals obtain full relief from their trading or property income when they earn up to £1,000 or less. When their earnings exceed this amount, they will only receive partial relief. There are various ways to obtain these allowances, such as through using actual allowable expenses or subtracting the allowances from their income, depending on their business’ expenses or other factors.

Trading income allowance applies to business owners who earn less than £1,000 for the tax year to cover for their business’ trading, miscellaneous, or casual earnings. Property income allowance, on the other hand, applies to those who generate profit from their property, such as by renting their garage or driveway.

It would be a great advantage for the self-employed to seek professional help when they’re unsure how to claim their allowance/s—whether through allowable expenses or subtracting them from their income—and be guided throughout the process.

Income Tax Rates and Bands 2020-21

The same tax rates and bands apply to everyone imposed with the standard Personal Allowance, whether employed or self-employed. Take a look at these tax bands and rates from the year 2020 to 2021:
Tax band tax rate taxable income
Personal Allowance
0%
£12,500 and less
Basic Rate
20%
£12,501 to £50,000
Higher Rate
40%
£50,001 to £150,000
Additional Rate
45%
more than £150,000

Income tax rates and bands 2021-22

For the tax year 2021/22, the tax rates remain the same while the taxable income has had some adjustments. Here’s the tax rates and bands for this fiscal year:
Tax band tax rate taxable income
Personal Allowance
0%
£12,570 and less
Basic Rate
20%
£12,571 to £50,270
Higher Rate
40%
£50,271 and £150,000
Additional Rate
45%
more than £150,000
The same tax bands and rates apply to the next fiscal year, 2022-23, although different countries in the UK have subtle differences in tax rates. Northern Ireland, England, and Wales usually impose the same rates and taxable income whilst Scotland takes some digressions.
Income tax rates and bands 2021-22
The UK and Scotland have a few differences when it comes to taxes, especially regarding tax bands, in which the UK has three whilst Scotland has five. It can also become a complex matter when the self-employed either work or live in the border regions. In this situation, they had better get professional advice.

Filing an Income Tax Return for Self-Employed

Self-employed individuals pay taxes through Self-Assessment Tax Return. The first step is to register as self-employed with HMRC, which could either be online, paperwork, or commercial software. There are various software HMRC made from which they can choose.

If it’s their first time filing for a tax return, they will be designated a Unique Taxpayer Reference (UTR) number, a ten-digit number that will be required every time they file. They will also be registered to Class 2 National Insurance, which they will be contributing automatically if their income goes beyond a certain threshold but voluntarily if it doesn’t.

Why Seek the Help of Tax Professionals

Unique tax situations may require more than the one-size-fits-all approach of the standard computing tools to get an accurate income tax bill computation. For this, manual calculation by tax professionals proves to be more reliable.

Aside from working out their income tax liabilities, tax professionals can also calculate other bills relevant to self-employment, including National Insurance and VAT, if a business registered for it, for the past or current tax year.

Most of all, they provide thorough guidance around self-employment, not just computing their self-employed tax rate or claiming their reliefs, as they provide immediate and simplified answers to any questions their clients may have. Legend Financial is known for this. Reach us today and see how easy working around taxes can be with our help.

References

Income Tax rates and Personal Allowances. (n.d.). Retrieved from gov.uk: https://www.gov.uk/income-tax-rates

Self-employed ready reckoner. (n.d.). Retrieved from gov.uk: http://www.hmrc.gov.uk/tools/sa-ready-reckoner/calculator.htm

Income Tax rates and allowances for current and past years. (n.d.). Retrieved from gov.uk: https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past

Tax-free allowances on property and trading income. (n.d.). Retrieved from gov.uk: https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income

Renting out a property. (n.d.). Retrieved from litrg.org.uk: https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/property-income/renting-out-property

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