The beginner’s guide to self-employed tax rates and what they mean for you

Paying tax when self-employed

If you already run your own business, then you’re probably already very familiar with having to do your own taxes. However, if you’re only just starting out, then you might not be entirely sure how this process works.

Fortunately, working out how to pay tax when self-employed is much easier than it first seems. And once you have a handle on the various self-employed tax rates, it becomes a breeze.

So, if you need a hand working out what the steps are for paying tax when self-employed, keep reading.

Our guide will go into all the details you need to know to meet the HMRC standards.

Getting a self-employed tax overview

First things first, in order to start paying tax when self-employed, you’re going to need a self-employed tax overview. Also known as SA302 by HMRC, this document is an overview of any income your business has earned.

Essentially, a tax overview document will prove to HMRC that you’ve earned what you’ve stated.

While also acting as a useful record of your total income. It can even be used as evidence of your income if you’re applying for loans, such as a mortgage.

However, knowing your income is also incredibly important for understanding how much tax you will need to pay. And what tax bracket(s) your income will be subject to.

How to get your self-employed tax overview

To get your self-employed tax overview, you’ll first need to submit a self-assessment tax return. This is best done through HMRC’s online portal.

Though there are also some finance software tools and apps that can help with this.

Once you’ve submitted your self-assessment tax return you’ll then have to wait for at least 72 hours. This gives HMRC the time required to process your request.

But once this period has passed, you should be able to access your self-employed tax overview.

Naturally, this will be different if you’re using commercial finance software to submit your tax return. In this case, you’ll need to use that particular piece of software to access your tax overview.

What are the self-employed tax rates?

Unfortunately, when it comes to understanding your sole trader tax rate, there is no singular rate. Instead, the tax you pay is broken down into different levels, based on established tax brackets.

These are as follows:

• Personal allowance – any income you earn between £0 – £12,570 cannot be taxed (This is also known as your tax-free allowance)
• Basic rate income tax – any income you earn between £12,571 – £50,270 will be taxed at a rate of 20%
• Higher rate income tax – any income you earn between £50,271 – £125,140 will be taxed at a rate of 40%
• Additional rate income tax – any income you earn over £125,141 will be taxed at a rate of 45%

How to calculate your level of tax

Stating what the tax brackets are is all well and good, but sometimes they’re not entirely clear. So, to put them in perspective, let’s look at a practical example of how your business’s income could be taxed.

Say your business earned £60,000 in the 2022/23 tax year. In this case, you’d pay tax in the following manner:

• First, you would pay 0% tax on the first £12,570 of your earnings
• Next, you would pay a 20% tax on all earnings between £12,571 – £50,270. So, in this case, you would owe £7,540 in tax in this bracket
• Finally, as your total income is above £50,270, you would also need to pay tax in the higher rate bracket on the remaining £9,730. This equates to 40% tax, meaning you would pay £3892 on this last section of your income

Therefore, in total, you would pay £11,432 if you earned £60,000 in a year. This might sound a lot. But there is some very good news coming up as you’re eligible for self-employed tax deductions.

It’s also worth noting that you only get taxed at various stages of your earnings. Rather than at the highest bracket for its entirety.

So, rest assured you will not be taxed excessively if your earnings do fall into higher brackets.

Understanding self-employed tax deductions

One of the many benefits of being self-employed is the ability to claim for business-related expenses. This means you can get self-employed tax deductions that help you save money and reduce the overall tax you pay.

Below are just some of the common areas you can claim self-employed tax deductions for:

• Office costs such as stationery or phone bills
• Travel costs, including fuel, parking, train, or bus fares
• Clothing expenses for uniforms
• Staff costs, including salaries or subcontractor costs
• Things you buy to sell, such as stock or raw materials
• Financial costs for any insurance or bank charges
• Costs relating to your business premises, such as heating, lighting, and business rates
• Any advertising or marketing, including website costs
• Training courses related to your business

As you can see, there are many things you can claim self-employed tax deductions for across your business. But this also means that keeping a record of your costs Is very important.

Therefore, you should always make a record of any invoices and receipts. That way, you can prove what business costs you’ve paid.

It’s also very important to note that you can only claim allowable expenses for your business costs. Not your personal costs. We suggest reading the government’s simplified expenses advice for further clarity.

Do self-employed tax deductions apply when working from home

If you work from home, you will still be able to claim tax deductions in certain areas. Such as on training and marketing costs. But you may also be able to claim on a proportion utility bill, telephone, and internet cost.

In some cases, you may even be able to claim on your council tax, rent, or mortgage interest.

However, in order to claim for these tax deductions, you’ll need to accurately divide a proportion as a cost to your business. For example, you could divide the amount of time you spend working from home by the number of rooms you use for your business.

Alternatively, you could use the system known as simplified expenses. This essential sets a flat rate for deductions. And can apply to areas like work vehicles, home working, or living on your business premises.

With that being said, simplified expenses can only be used by sole traders, not limited companies.

Save money on your business with Checkatrade

Hopefully, you should now have a much better idea of how to handle your self-employed tax return. But did you know there are plenty of other ways you could save money with your business?

For example, by joining Checkatrade today, you’ll get access to discounts from our partner brands.

It might be the right time to become a member due to the following:

• Increase work coming your way with job leads
• Access our trade app – with job management, quoting/invoicing, profile management and messaging
• Offers and discounts – save on business essentials
• We’ll guarantee your work for 12 months up to £1,000*

Get in touch with our team today to learn more about our sign-up process and member benefits.

Self-employed tax FAQs

How much tax will I pay if self-employed?

As our earlier example shows, the amount of tax that you pay will depend on how much money you make. But you’ll also be eligible for some self-employed tax deductions.

This will be offset against your tax, meaning you’ll pay less tax overall.

Do self-employed people pay less tax?

Potentially. However, once again, how much tax you pay will depend on your overall earnings.

So, someone who’s employed with a salary of £30,000 will pay less tax than a sole trader earning £60,000.

With that being said, this is not always the case. And there are many ways to pay less tax as a sole trader.

Disclaimer
This information is for guidance purposes only and does not amount to financial or legal advice or recommendation. The content and materials featured or linked to on this blog are for your information and education only and are not intended to address your particular personal requirements. The information does not constitute financial advice or recommendation and should not be considered as such. The Checkatrade website is not regulated by the Financial Conduct Authority (FCA), its authors are not financial advisors, and it is therefore not authorised to offer financial advice. Always do your own research and seek independent financial advice when required. Any arrangement made between you and any third party named or linked to from the site is at your sole risk and responsibility. Checkatrade blog and its associated writers assume no liability for your actions.

* Find out more here: https://www.checkatrade.com/blog/trade/start-business/win-more-work-with-guarantee/