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Tax and NI for Self-Employed
Business structure
When starting a business in the UK, self-employed individuals can choose from several business structures, each with different tax implications.
As a self-employed person (also known as a sole trader), you operate as an individual business owner—this is the simplest and most straightforward option. For businesses with multiple owners, a partnership structure allows two or more people to share responsibilities and profits.
In both cases, you must register with HM Revenue & Customs (HMRC) for self-assessment. This involves submitting an annual tax return that calculates your tax and national insurance contributions based on your business income.
Alternatively, you can operate through a limited company. This structure separates your personal and business finances, with you serving as a company director. Limited company directors typically receive income in two ways: a salary processed through the company’s payroll, and dividends drawn from the company’s profits after corporation tax. While salary is taxed through PAYE (Pay As You Earn), you must report and pay tax on dividend income through a self-assessment tax return.
Tax and NI for sole traders
Your taxable income as a self-employed person is calculated by deducting business expenses and your personal allowance from your total income. The remaining amount—your net income—is then taxed according to the relevant PAYE tax bands. For example, income within the basic rate band is taxed at 20%.
Self-employed individuals pay Class 4 national insurance contributions of 6%. As of April 2024, the system has been simplified:
- Class 2 contributions have been abolished.
- Those earning below £6,725 can make voluntary Class 2 payments of £3.45 weekly to maintain their eligibility for certain state benefits.
- Class 4 contributions are paid at the following rates:
- 6% on net profits between £12,570 and £50,270.
- 2% on any profits above £50,270.
To estimate your monthly or annual net pay if you are self-employed, use MQ’s self-employed calculator:
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)
Do you want to track your tax and NI liability over the year?
Check out our self-employed tax resource in our shop. Our Excel spreadsheet makes tracking your monthly and cumulative tax and national insurance liability over the year a doddle.
Example – self-employed/sole trader:
This example shows the breakdown and calculation of the tax and national insurance liability for a self-employed person 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 limited company directors
Running a limited company is more complex and there are additional reporting requirements. However, it does offer opportunities to structure your pay tax efficiently. If you work through a limited company, you may be subject to corporation tax, PAYE, dividend tax, and employer and employee national insurance contributions.
Corporation tax
Limited companies pay corporation tax on their profits at rates that vary based on profit:
- 19% corporation tax is due on profits up to £50,000.
- Profits over £50,000 pay tax at a marginal rate between 19% and 25%.
Director’s salary
Directors can pay themselves a salary through payroll, paying PAYE and employee national insurance. When you pay yourself as a company director:
- You pay PAYE on your salary above your personal allowance and according to the tax bands.
- You pay employee national insurance, which is calculated on your annual salary. On your salary between £12,570 and £50,270, NI contributions are 8% and 2% of your salary over £50,270.
- The company will pay employer national insurance contributions of 15% on your salary over £5,000 a year or £416 a month (from April 2025). This is an allowable expense, which reduces the corporation tax liability.
Dividends
Limited company directors can withdraw profits after tax as dividend income. Directors report and pay tax on their dividend income through an annual self assessment tax return. Dividends are taxed as follows:
- The first £500 of dividends is tax-free.
- Dividends falling within the basic rate tax band are taxed at 8.75%.
- Dividends within the higher rate tax band are taxed at 33.75%.
- Any dividends falling in the additional rate band are taxed at 39.35%.
Example – limited company
In this example, a limited company has a gross profit of £50,000 and expenses of £5,000. The company director, the only staff member, pays themself an annual salary of £15,000. The annual employer national insurance contribution is £1,500. The company pays corporation tax of 19% on the net profit of £28,500, which is £5,415. The company director takes £23,000 as dividends, leaving reserves of £85 in the company.
| Limited company accounts | Amount |
|---|---|
| Income | £50,000 |
| Expenses | |
| Administration costs | £5,000 |
| Salaries | £15,000 |
| Employer’s national insurance | £1500 |
| Total expenses | £21,500 |
| Net profit (income less expenses) | £28,500 |
| Less corporation tax of 19% | £5,415 |
| Profit after tax | £23,085 |
| Less dividends | £23,000 |
| Retained profit | £85 |
| Director’s pay & tax | Amount | Tax % | Tax amount |
|---|---|---|---|
| Salary | £15,000 | ||
| Dividends | £23,000 | ||
| Total income | £38,000 | ||
| 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 | £22,500 | 8.75% | £1,969 |
| Total tax payable on income | £2,455 | ||
| Summary of all tax paid | |||
| Tax on salary & dividends | £2,455 | ||
| Employee national insurance | £194 | ||
| Employer national insurance | £1,500 | ||
| Corporation tax | £5,415 | ||
| Total cost of tax and NI | £9,564 |
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)
