How do I budget for tax if I’m self-employed?

Whatever business you are in, income tax is one of the key financial considerations for every small business owner in the UK.

While income tax is generally deducted from your pay when you are an employee, when you are self-employed you must take responsibility for calculating and paying your income tax directly through HMRC (Her Majesty’s Revenue and Customs).

Self-employed income tax is a tax levied against the profits made by self-employed individuals within each tax year.

To work out your profits for any given tax year, simply deduct your business expenses from your total income.

The amount of income tax you pay on your profits when you are self-employed in the UK is no higher than if you were employed. The Money Advice Service put together this graph to demonstrate the current rates for the previous and coming tax years are:

Thankfully, the small business tax rates are only applied to the profit fraction that resides under each threshold. For example, if your profit is £70,000 in the current tax year, you could expect to be taxed thus:

• 0 tax on £12,570
• 20% tax on £37,770 (the difference between £12,570 and £50,270)
• 40% tax on £19,730 (the amount over £50,270)

When you are self-employed, you also have to pay your own National Insurance contributions (NICs). NICs have to be paid in order to enable you to claim a state pension in the future and serve to help others in the community in need of benefits, such as Universal Credit.

Everybody who is self-employed in the UK must pay NICs. These NICs are organised into classes, and self employed people will have to declare which class their business falls under.

• Class 2: in 2024-25 contributions at £6,725 or higher are treated as having been paid for. Some people choose to voluntarily pay class 2 contributions
• Class 4: in 2024-25 where profits taken were higher than £12,570

The contributions for these classes are:

• 6% of your profits between between £12,570 and £50,270, 2% on anything above this, for Class 4

When you’re self-employed and running your own small business, you have to complete a Self-Assessment tax return each year for the previous tax year.

The deadline for Self-Assessments typically fall at the end of January for online returns, and earlier – in October – for paper returns (as these take longer for HMRC to process).

In your Self-Assessment, you will have to declare:

• Your total income
• Your expenses
• Any losses

When you have submitted your return, HMRC will calculate how much you have to pay in tax and NICs. You can pay this online or by cheque, but payments must be made by January 31. If you do not pay by this date, you could incur a hefty fine if you don’t have a legitimate reason for the delay.

Use the interactive tax calculator below for a rough guide on how much you’ll need to pay. 

If your business is operating as a limited company (Ltd) or a limited liability partnership (LLP), then your process for paying your small business tax will be quite different.

You will still need to declare your personal income, expenses and losses, incurred through you operating your business, but you will need to pay corporation tax on your business profits.

Work out how much corporation tax you will owe for the current tax year.