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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 (£12,570 for 2021/22 and 2023/24) will be taxed at either the basic, higher, or additional 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.
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 2023/24 began on 6 April 2023 and will end on 5 April 2024. 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.
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
| 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
Income tax remained constant for tax years 2022/23 and 2023-24, although the tax rates remain the same from 2021-22 while the taxable income has had some adjustments. Here are the tax rates and bands for the fiscal year 2022-23 and 2023-24:
| 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 |
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 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 or Class 4 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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