Your basket is currently empty!
Tax and NI for Self-Employed
Self-employed individuals in the UK have several business and tax options available. The simplest option is working as a self-employed person or sole proprietor/trader. If there are two or more people in a business a partnership may be a good option. Self-employed individuals and partners need to register with HMRC for self assessment and submit an annual self-assessment tax return. They pay tax and national insurance contributions based on their tax return.
The other self-employed option is working through a limited company. Directors of limited companies can pay themselves a salary through payroll, as an employee. Limited company directors can also withdraw money from the company as dividends. Company directors report and pay tax on dividend income through a self assessment tax return.
Tax and NI for the self-employed
Self-employed individuals pay tax on their net income, which is their income less business expenses minus their personal allowance. Their tax band determines the tax rate. A self-employed person whose income falls within the basic rate tax band pays tax at 20%.
Self-employed people pay national insurance at different rates to employed people. Self-employed individuals pay Class 2 and Class 4 contributions. Class 2 contributions are no longer payable from April 2024. Self-employed individuals who earn below £6,725 can pay voluntary Class 2 contributions of £3.45 a week to maintain their rights to certain state benefits. Class 4 contributions are 6% on net profits above £12,570 and up to £50,270 (2024/25 tax year). On profits over £50,270 Class 4 national insurance contributions are 2%.
HMRC calculator
HMRC has a useful calculator for self-employed people to calculate their tax and national insurance liability:
Budget for your Self Assessment tax bill if you’re self-employed – GOV.UK (www.gov.uk)
Have a look at MQ’s self-employed tax and national insurance calculator in our shop. It’s a handy excel spreadsheet that calculates monthly and cumulative tax and NI, allowing you to track your tax liability over the year.
Below is an illustration of the tax and national insurance calculations for a self-employed individual with a net income of £45,000:
| TAX | Amount |
|---|---|
| Income | 60,000 |
| Less expenses | 15,000 |
| Net profit/income | 45,000 |
| Less personal allowance | 12,570 |
| Taxable income | 32,430 |
| Tax of 20% on £32,430 | £6,486 |
| National insurance | Amount |
|---|---|
| 6% of £32,430 (45,000 – 12,570) | £1,946 |
| Tax | £6,486 |
| TOTAL TAX and national insurance | £8,432 |
| NET PAY (45,000 – 8,432) | £36,568 |
Tax and national insurance for a limited company director
There are additional tax complexities with limited companies but also opportunities to structure your tax more efficiently. Limited companies pay corporation tax on their net profits. UK corporation tax is a marginal rate of between 19% and 25%, dependent on profits. Companies with net profits of £50,000 or less pay 19% corporation tax. Depending on how you structure your income, an individual working through a limited company will likely pay corporation tax, PAYE, employee and employer national insurance and dividend tax.
Directors of limited companies can pay themselves a salary through payroll and pay PAYE and national insurance. Company directors’ national insurance is slightly different to employees with contributions calculated on annual earnings. Directors pay employee national insurance on earnings over £12,570 per annum.
Limited companies also pay employer’s national insurance on directors’ earnings. Employer’s NI is 13.8% on directors’ earnings above the annual secondary threshold of £9,096. Assuming an annual salary of £15,000, the employer’s annual national insurance contribution is £814. The company director’s employee contribution is £194, or 8% of their payroll earnings over the threshold of £12,570.
Dividends
Directors of limited companies have the flexibility to withdraw profits as dividend income. Directors pay tax on their dividend income through an annual self assessment tax return. The first £500 of dividends are tax-free. Dividends above the £500 allowance and falling within an individual’s basic tax rate band, pay 8.75% tax. Any dividends falling within the higher rate band, incur tax at 33.75% (income above £50,271). Dividends falling in the additional rate tax band are taxed at 39.35%.
Illustration of limited company tax
In the following illustration, a limited company has income of £50,000 and expenses of £5,000. The company director, who is the sole staff member of the company takes an annual salary of £15,000. The employer national insurance contribution on the salary is £814 for the year. The company pays corporation tax of 19% on the net profit of £29,186, which is £5,545. The company director takes £23,500 as dividends, leaving £141 reserves in the company. The tax paid on net income of £45,000 is around 20%, which is similar to that of a self-employed individual with the same net income.
| Limited company accounts | Amount |
|---|---|
| Income | £50,000 |
| Expenses | |
| Administration costs | £5,000 |
| Salaries | £15,000 |
| Employer’s national insurance | £814 |
| Total expenses | £20,814 |
| Net profit (income less expenses) | £29,186 |
| Less corporation tax of 19% | £5,545 |
| Profit after tax | £23,641 |
| Less dividends | £23,500 |
| Retained profit | £141 |
| Director’s pay & tax | Amount | Tax % | Tax amount |
|---|---|---|---|
| Salary | £15,000 | ||
| Dividends | £23,500 | ||
| Total income | £38,500 | ||
| Breakdown of tax payable: | |||
| Salary | £15,000 | ||
| Less personal allowance | £12,570 | ||
| Taxable income on salary | £2,430 | 20% | £486 |
| Tax free dividends | £500 | 0% | £0 |
| Dividends taxed at basic rate band | £23,000 | 8.75% | £2,013 |
| Total tax payable on income | £2,499 | ||
| Summary of all tax paid | |||
| Tax on salary & dividends | £2,499 | ||
| Employee national insurance | £194 | ||
| Employer national insurance | £814 | ||
| Corporation tax | £5,545 | ||
| Total cost of tax and NI | £9,052 |
Self assessment tax returns
Self-employed individuals must file their online self assessment tax returns with HMRC by 31st January of the following tax year. For example, a tax return for the tax year 2024/25 (6th April 2024 to 5th April 2025) must be filed with HMRC by 31st January 2026. Any PAYE and national insurance owing must also be paid by this date. In addition, self-employed individuals are required to make a payment on account for the current tax year, of 50% of the tax estimated to be owed. This payment is based on the individual’s most recent self assessment tax return.
The payment of tax due by 31st January 2026 consists of:
- The balance of any tax still owing for 2024/25 which is the period 6 April 2024 to 5 April 2025.
- A payment on account of 50% for the tax year 2025/26
On 31st July 2026:
- A second payment on account for the tax year 2025/26 of 50% of the estimated tax charge. The estimate is based on the tax charge for 2024/25.
Register for self assessment and HMRC personal tax account
You can register for a personal tax account on HMRC’s website. This allows you to do various tasks, such as check your tax code and national insurance number, claim a tax refund and update your details. It is straightforward to set up and you will need an email address, mobile number, and two forms of identification. You can also set up a business account at the same time. A business account allows business owners to register for self-assessment and other taxes, such as VAT.
The link is: – Personal tax account: sign in or set up – GOV.UK (www.gov.uk)
