How are you taxed and what are the special rules for certain types of workers? 

When you are self-employed you have to account for, and pay, your own tax and National Insurance Contributions (NICs) to HM Revenue & Customs (HMRC).

  • The amount of tax and NICs you pay is based on your accounting profits earned in the tax year.
  • Your accounting profit is your self-employment income less your expenses.
  • This accounting profit may then be adjusted for various tax allowances or add-backs. 
  • To work out how much tax is due, you need to add up your profit plus all your other income from different sources e.g. employment, bank interest, dividends, and then deduct your personal allowance and any other tax allowances. The result is then taxed at a basic, higher or additional rate and NICs will be calculated based on your profit.
  • Expect your tax bill to be something like 10-30% of your profit if you are a Basic rate taxpayer. The size of your tax bill will depend on whether you have other income to use up your tax-free allowances and what expenses you can claim to reduce your profit.

There are different ways of accounting and claiming your expenses.

  • This guide shows a business operating on a cash received/cash paid basis (the Cash basis), claiming actual expenses.
  • Other guides take a closer look at what you can claim and look at alternative claims and reliefs on offer.

Worked example

  • James decides to run his own business as a self-employed musician.
  • He prepares his accounts for each tax year.
  • The tax year starts on 6 April and ends on the following 5 April.

In the tax year 6 April 2021 to 5 April 2022, he earns £25,000 per year from session work, gigging and busking.

He claims tax relief on his business costs of £5,000 which are incurred on:

He has also bought a new laptop and a van for his work this year. These cost him £3,500.

His total costs are £8,500 (£5,000 + 3,500), making his profit for the year £16,500.

His accounts for the year ending 5 April 2022 are as follows:

Account name

£

Sales

25,000

Expenses:

 

Direct costs (stage costumes)

800

Use of home

550

Office costs (telephone)

400

Motor and travel

2,500

Subsistence

500

Accommodation

100

Repairs & renewals

150

Total expenses

(5,000)

 

 

Net profit (sales - expenses)

20,000

 

 

Less capital equipment costs

(3,500)

   
Profit for tax 16,500

 

Other income for 2021-22

  • He has earned £25 in interest and received £250 in dividends from some shares left to him by his grandmother.
  • He also earned £1,500 working as a barman. His employer deducted £300 in tax from his employment income.

Notification of liability

  • James should have notified HMRC when he commenced self-employment. The deadline for notifying is 5 October following the end of the tax year in which self-employment commences. 
  • HMRC will then send him a notice to file his tax return for 2021-22.

Tax and tax return

  • James must submit his 2021-22 return online by 31 January 2023, or the date specified on HMRC's notice (if later).
  • He enters his self-employed details in the self-employed section of the return,  his employment details in the employment section and the interest and dividends income in the savings and investment pages.
  • To complete his return he needs to know his tax reference (UTR) and his National Insurance number (NINO) and his employer's PAYE reference (this is from his P60 or P45 issued by his employer).

Tax calculation

His tax is calculated according to the return entries as follows:

2021-22 tax year

£

£

Tax due

Employment income

 

1,500

 

 

 

 

 

Self-employed income

20,000

 

 

Less: capital expenses

(3,500)

 

 

Taxable profit

 

16,500

 

 

 

 

 

Interest

25

 

 

Less: savings allowance

(25)

 

 

Taxable savings income

 

0

 

 

 

 

 

Dividend

250

 

 

Less: dividend allowance

(250)

 

 

Taxable dividend income

 

0

 

Total income

 

18,000

 

Less: Personal allowance

 

(12,570)

 

Taxable income

 

5,430

 

Tax @ 20%

 

1,086

 

Less: tax deducted at source

 

(300)

 

Tax due

 

 

786

 

 

 

 

National insurance

 

 

 

Profit

16,500

 

 

Lower limit

9,568

 

 

Profits for NI

6,932

 

 

Class 4 NI @ 9%

 

 

624

Class 2 NICs (flat-rate £3.05 p.w.)

 

 

159

NICs due

 

 

783

 

 

 

 

Total tax & NI payable

 

 

1,569

 

He will then pay tax as follows:

Date

Detail

Tax

31/1/2023

Final payment for 2021-22

1,569

 

1st Payment on account for 2022-23*

705

 

 

 

31/7/2023

2nd Payment on account for 2022-23*

705

 

 

 

31/1/2024

Tax liability for 2022-23

  ?

 

Less: Payments on account already made**

(1,410)

 

Final payment for 2022-23

  ?

 

1st Payment on account of 2023-24 

  ?

 

 

 

 Notes

*

  • Your first and second 'payment on account' is calculated as half of your tax and NI liability (excluding class 2 NI) for the previous year.
  • You only make a payment on account if your tax liability is £1,000 or higher.

**

  • Your payments on account are payments of tax in advance of the following year and so these are deducted from your following year's tax bill.

We don't know what James' tax bill is for 2022-23 so this is added when he files his next tax return. 

It is possible that his income for 2022-23 will be lower than 2021-22. If so, he can ask HMRC to reduce his payments on account for 2022-23.

Next guide in this series

Agency or Umbrellas
How to check whether your agency is putting you into an illegal tax avoidance scheme.


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