As the saying sort of goes, paying tax is pretty much inevitable, whether you’re employed, self-employed, or earning money from a side hustle or as a landlord.
The money you earn from an employer is usually taxed at source, which means that your employer deducts the right amount of tax and National Insurance on your behalf, and pays this on to HMRC. Income from other sources is a bit different because you’ll need to report this yourself through Self Assessment.
At the moment submitting a Self Assessment tax return is an annual process, but this will change from April 2024 when Making Tax Digital for Income Tax Self Assessment (or MTD ITSA for short) is expected to launch. We’ll come back to that in more detail later.
In the meantime, in this blog post we’ll answer frequently asked questions around paying Income Tax as a self-employed person.
- Who is expected to pay Income Tax?
- How much Income Tax do self-employed people need to pay?
- What happens if I am both employed and self-employed?
- How do I pay my Income Tax through Self Assessment?
- Tips on how to prepare for Self Assessment
- Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)
Who is expected to pay Income Tax?
Income Tax is payable on pretty much all the income that you earn. If you are employed, then your earnings from that job are most likely taxed through the PAYE system so you don’t need to worry.
Earnings outside of that, such as from freelance work, dividends, or a side hustle, normally aren’t taxed, so you’ll need to report these via Self Assessment and pay the right amount of tax on them. This income could come from a range of different sources, such as:
- Savings, investments, or dividends
- Profit shares from a business partnership
- Foreign income
- Tips or commission
- Rental income from a property
How much Income Tax do self-employed people need to pay?
The amount of Income Tax you pay can vary each time you submit a Self Assessment because it depends on how much you earn, and which tax band your earnings fall into. There are tax allowances too, such as:
- The Personal Allowance. The threshold is currently set at £12,570, which means you can earn £12,570 in a tax year before you start paying income tax.
- The dividend allowance. This is currently £2,000, so you won’t pay dividend tax on the first £2,000 of dividends that you receive in a tax year. The Chancellor’s Autumn Statement announced the dividend allowance will reduce to £1,000 in the 2023/24 tax year, and then halve again to £500 in 2024/25.
The tax you pay as a self-employed person is worked out on the amount of profit that you make, not the total income. This is because you’re entitled to tax relief on allowable expenses, which reduces the amount of profit, so you’ll pay less tax.
It’s why it’s so crucial to keep good bookkeeping records, so that you can claim all your allowances, and pay the right amount of tax! Hey, every penny really does count right now. Check out our guide to tax relief and allowances for self-employed people to learn more.
What are the current Income Tax rates?
The current Income Tax bands and rates are as follows:
|Tax Band Name||Tax Band Range||Tax Rate|
|Basic Rate||£12,571 to £50,270||20% on earnings in this range|
|Higher Rate||£50,271 to £150,000||40% on earnings in this range|
What happens if I am both employed and self-employed?
It’s quite possible that you have a full-time (PAYE) job as well as additional self-employed earnings. In fact, research published by Henley Business School showed that 1 in 4 UK adults have a ‘side hustle’ (AKA a secondary source of income).
So, what happens with Income Tax in this scenario?
Well, the tax and National Insurance you are required to pay on your employment earnings will be taxed through PAYE, so you don’t need to worry about that. You will, however, still need to tell HMRC about your self-employed income.
You’ll also need to make sure you include the details of your employment income on your Self Assessment. You won’t pay tax on it twice, but you’ll need to show HMRC so they can cross-reference your PAYE record.
You might have a full-time job in marketing but do freelance copywriting on the side. Your marketing employment will be taxed through PAYE, but you’d need to declare your freelance earnings to HMRC yourself through Self Assessment.
The Trading Allowance means you can earn up to £1,000 through self-employment tax-free but anything beyond that will be taxable.
How do I pay my Income Tax through Self Assessment?
The whole Self Assessment and paying tax thing can feel super daunting. We get it, but the good news is that maintaining good bookkeeping habits throughout the financial year makes the process much simpler.
1. Register for Self Assessment
The first thing you’ll need to do—if you haven’t already—is to register for Self Assessment. This lets HMRC know to expect a Self Assessment tax return from you, so that you can pay the Income Tax due on your taxable earnings.
This is easily done in two simple steps:
- Set up a business tax account on the Gov.UK website and get your Government Gateway user ID.
- Wait to receive your Unique Taxpayer Reference (UTR) from HMRC, usually within 10 days. When you sign in you’ll need to link your tax account to your Gateway ID.
2. Submit and pay
Submit your return, complete with all necessary financial information and allowable expenses. You’ll normally receive your tax calculation as soon as you submit, and can pay the bill in a number of ways:
- Direct debit
- Online bank transfer
- Telephone bank transfer
- At a bank or building society
- By cheque
Making Tax Digital for Income Tax Self Assessment
Making Tax Digital (MTD) is a government initiative designed to simplify how business owners manage their taxes. The changes are being rolled out in stages, with MTD for VAT having been in place since April 2022.
Making Tax Digital for Income Tax Self Assessment is the next phase to be rolled out, which will transform how self-employed people and landlords record their income and expenses.
As of 6th April 2024, the new rules for MTD ITSA become compulsory for anybody whose total income from self-employment or property is more than £10,000. If you want to get ahead of the game, you can volunteer to sign up for MTD ITSA earlier.
Once you register for MTD, you’ll no longer submit an annual Self Assessment return. Instead, you’ll need to make sure you keep digital financial records, and submit these to HMRC on a quarterly basis using MTD-compliant software. Depending on what you use for your bookkeeping, you can either submit directly from the software itself, or use bridging software.
When the tax year comes to a close, you will then submit a final end-of-period statement (EOPS), which will document earnings and expenses. You will also send a final declaration of income and it’s at this point that you’ll pay the Income Tax and National Insurance due.
Pandle is easy to use cloud-based bookkeeping software which helps reduce the amount of time users spend taking care of the books. Learn more, and create your free account.