How Much Tax Will I Pay When I’m Self-Employed?

Your tax obligations are relatively simple when you’re in conventional employment. You need to turn up for work, do your job and get paid and your taxes are deducted at source through Pay As You Earn (PAYE). But the picture is different for the self-employed.

When you’re self-employed you have the responsibility of running your business which is no easy task in itself. On top of that, you also have the responsibility of calculating your taxes, paying what you owe and ensuring that you are compliant.

Tax-efficiency is a key reason why people move into self-employment and operate outside IR35 through their own limited company, so the question of ‘how much tax will I pay’ is one that many have asked.

In this post we’ll break down the different taxes you might have to pay when you’re self-employed, whether as a sole trader or through your own limited company, in the 2024/25 tax year as well as how Gorilla can help you reduce your tax liability whilst remaining compliant.

Income Tax for the Self-Employed

Income tax must be paid by all self-employed individuals on taxable income over the £12,570 tax-free personal allowance. For sole traders, income tax is paid on the net profits of their business after any allowable expenses. For limited company Directors, income tax is paid on salary.

An annual self-assessment tax return must be filed with HMRC to determine the amount of income tax due, and the amount you pay depends on which tax band your total taxable income places you in. For the 2024/25 tax year, the income tax bands are as follows:

Personal Allowance

  • Taxable Income Up to £12,570
  • Tax Rate 0%

Basic Rate Band

  • Taxable Income £12,571 – £50,270
  • Income Tax Rate 20%

Higher Rate Band

  • Taxable Income £50,271 – £125,140
  • Income Tax Rate 40%

Additional Rate Band

  • Taxable Income Over £125,140
  • Income Tax Rate 45%

National Insurance Contributions (NICs)

In addition to income tax, self-employed people pay National Insurance contributions (NICs) which are used to fund certain state benefits and pensions.

Sole traders with taxable profits above the personal allowance threshold of £12,570 will pay class 4 NICs at 6% on profits between £12,570 and £50,270 and at 2% on profits above £50,270. If annual profits are lower than £6,725, voluntary class 2 NICs can be paid at £3.45 per week.

Limited company directors earning more than £242 per week will pay NICs on any annual income over £12,570 from salary and bonuses and the limited company will pay employer NICs.

Voluntary Class 3 NICs can also be paid by people wanting to fill gaps in their contributions record so they can receive full access to benefits such as the state pension.

Dividend Tax

If you operate through your own limited company and dividends form part of your remuneration strategy then you will likely have to pay dividend tax. The first £500 of any dividends you receive are tax-fee thanks to the dividend allowance. Any dividends you receive outside your tax-free personal allowance will then be taxed at the below rate depending which tax band you’re in based on your total taxable income.

Dividend Allowance

  • Dividend Income Up to £500
  • Tax Rate 0%

Basic Rate Band

  • Taxable Income £12,571 – £50,270
  • Dividend Tax Rate 8.75%

Higher Rate Band

  • Taxable Income £50,271 – £125,140
  • Dividend Tax Rate 33.75%

Additional Rate Band

  • Taxable Income Over £125,140
  • Dividend Tax Rate 39.35%

Dividend tax rates are lower than income tax rates which is why utilising dividends as part of your remuneration strategy, when you operate outside IR35 through your own limited company, can result in a lower tax liability.

Corporation Tax

Corporation tax is applicable to all limited companies and, unlike income and dividend tax, is applied to the business itself rather than the individual. It’s levied on the taxable profits of the limited company at the following rates:

  • Companies with profits below £50,000: Small Profits Rate 19%
  • Companies with profits over £250,000: Main Rate 25%
  • Companies with profits between £50,000 and £250,000: Marginal Rate on a sliding scale between 19% and 25%

Value Added Tax VAT

If your annual turnover is higher than that £90,000 mandatory VAT registration threshold then you must register for VAT, but you can also register voluntarily if your turnover is below the threshold.

When you’re VAT registered you must:

  • Charge VAT on taxable goods and services that you sell
  • Pay VAT on goods and services purchased from other VAT registered businesses
  • Complete a quarterly VAT return

Your VAT returns break down the amount of VAT you must pay by showing the amount of output VAT generated from sales minus input VAT which is the total VAT that’s reclaimable on purchases made by your business. The resulting amount is the VAT you must pay to HMRC, but if the input VAT is higher than the output VAT, you will receive the difference back from HMRC.

Under the standard rate VAT scheme VAT is levied at 20% and under the flat rate scheme it varies between 4% and 14.5%. If you spend less than 2% of your annual VAT-inclusive turnover on goods, or less than £1,000 annually on goods if costs are higher than 2%, you’re classed as a limited cost trader and pay VAT at 16.5% under the flat rate scheme.

Capital Gains Tax

If you dispose of certain assets, you might be liable to pay Capital Gains Tax for gains made outside your tax-free personal allowance. You also benefit from a Capital Gains tax-free allowance of £3,000 or £1,500 for trusts. It’s important to note that it’s the profit you make that’s taxed, not the total amount of money that you were paid for any sale.

Capital Gains Tax is paid on chargeable assets such as property that’s not your main dwelling, shares that aren’t held in an ISA or PEP, certain business assets and most personal possessions with a value of £6,000 or more excluding your car. Certain reliefs can be claimed to reduce the amount of CGT that you pay.

Capital Gains Tax isn’t levied on wins from betting or the lottery, Premium Bonds, UK Government Gilts and ISAs or PEPs.

The amount of Capital Gains Tax you pay is dependent on which income tax band you are in. To determine this, you need to subtract your personal allowance and any other income tax reliefs from your total income to get your taxable income. You then deduct your tax-free allowance from your total taxable gains and add that to your taxable income. If the resulting amount is with the basic rate income tax band, the Capital Gains Tax you’ll pay is:

  • 10% on your Capital Gains
  • 18% on gains made on carried interest and residential property sales
  • Dividend Tax Rate 8.75%

If the amount is within the higher or additional rate income tax bands, you’ll pay:

  • 20% on your Capital Gains
  • 24% on gains from residential property sales
  • 28% on gains from carried interest

How Gorilla Can Help With Your Tax Obligations

Proactive and effective tax planning is a prerequisite for self-employed people to meet their tax obligations, ensure compliance and avoid any fines or penalties from HMRC. Another facet of your overall tax strategy is tax optimisation to ensure you are operating as tax-efficiently as possible to minimise your overall tax liability.

When you appoint Gorilla this is included as part of our accounting service. All your business and personal accounting needs, including your tax obligations, will be expertly managed by your own dedicated accountant.

We will advise you on the most tax-efficient remuneration strategy and ensure you’re claiming all allowable expenses and making the most of available tax reliefs and allowances. Your accountant will always be abreast of any changes in tax legislation meaning you don’t have to be.

As part of our service you receive full access to award-winning FreeAgent cloud accounting software. FreeAgent’s clever automation means your taxes are calculated in the background while you work based on the information you input throughout the year, and your tax returns can be submitted electronically to HMRC.

You can use our Salary & Dividend Calculator to get a quick overview of your tax liability and if you have any questions about your tax affairs or our accounting service, speak to an accountant today on 0330 024 0406 or request a callback.

 

 

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