Skip to main content
Budget planning
5 min read

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

When you’re self-employed, budgeting for your taxes can be challenging.

Millions of self employed leave it until the last minute, filing their self assessment tax return just in time for the 31 January deadline. That state of panic about how much tax you owe and how you’ll pay it can be avoided if you take control of the situation.

In this article, we’ll run through which taxes apply to your small business and help you put together a comprehensive tax budget – ensuring you have peace of mind knowing exactly what you need to pay. 

Income tax when 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:

Rate

2020/21 and 2019/20

Personal allowance: 0%

£0 to £12,500 you will pay zero income tax on your profits

Basic rate: 20%

£12,501-£50,000 you will pay 20% tax on your profits

Higher rate: 40%

£50,001-£150,000 you will pay 40% tax on your profits

Additional rate: 45%

Over £150,000 you will pay 45% tax on your profits

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 2019/20 tax year, you could expect to be taxed thus:

  • 0 tax on £12,500
  • 20% tax on £37,500 (the difference between £12,500 and £50,000)
  • 40% tax on £20,000 (the amount over £50,000)

National Insurance Contributions when self-employed

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.

How much do self-employed workers pay towards National Insurance?

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 2019-2020 where profits taken were higher than £6,365 (in 2020-2021 the figure will be £6,475)
  • Class 4: in 2019-2020 where profits taken were higher than £8,632 in 2020-2021 the figure will be £9,500)

In the coming tax year, 2020-2021, the contributions for these classes will be:

  • £158.60 per year for Class 2
  • 9% of your profits between £9,500 and £50,000, 2% on anything above this, for Class 4.

How to pay tax and National Insurance when self-employed

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. 

Self employed tax and national insurance calculator

Use our handy calculator to find out how much tax will you will pay*

£

Please note that the results you see on your screen are estimates only. This is based on base rates and does not include things such as student loans. For full details of tax allowances, please see our article on 2020/21 tax rates.

Your take home pay and calculation

Please note that the results you see on your screen are estimates only. This is based on base rates and does not include things such as student loans. For full details of tax allowances, please see our article on 2020/21 tax rates.

Corporation Tax

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.

End of Article
Share this content

Brought to you by:

AAT Skills Store

A leading player in the world of accounting and finance training, AAT qualifications have been studied by hundreds of thousands of professionals all over the world, representing businesses across the spectrum.

AAT Skills Store is a new way to engage with AAT’s award winning learning materials. Through this dedicated store you’ll be able to purchase a growing selection of interactive online finance courses designed to help you upskill without setting foot in a classroom. 

Visit partner's website

Register with Informi today:

  • Join over 20,000 like-minded business professionals
  • Create your own personalised account with curated reading lists and checklists
  • Access exclusive resources including business plans, templates, and tax calculators
  • Receive the latest business advice and insights from Informi
  • Join in the discussion through the comments section

or

I’ve been working through the how to start a business in 20 days ebook and so many of the things I’d done are now nicely tied together and some gaps now filled. I love the simplicity. Thank you.

Sarah Gosling – Gosling Charity Consulting

I love receiving my Informi emails. They’re always well written and engaging.

Jennifer Hobson – JEH Bookkeeping

Coronavirus (Covid-19)The latest business guidance and support