A Guide to Income Tax for the Self-Employed

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A Guide to Income Tax for the Self-Employed

What is Income Tax?

Income tax in the UK is a tax levied on the income or profits made by individuals in any given tax year.

Who Pays Income Tax?

Everyone in the UK is liable for income tax. If you are an employee this is usually deducted ‘at source’ from your pay. If you are self-employed you will complete a Self Assessment tax form which you will file with HMRC, this will calculate the amount you need to pay in income tax.

How Do Self-Employed People Pay Income Tax?

If you are self-employed, you will not have your income tax deducted at source, instead, you will complete and file a Self Assessment tax return.

We have created a handy guide to completing and filing your Self Assessment tax return.

What is the Tax Rate for the Self-Employed?

Each person has an income tax personal allowance, and income up to this amount in each tax year is free of tax.

For the 2020/21 tax year, the tax-free allowance for under - 65s with income less than £100,000 is £12,500.

Any income above the personal allowance is taxed using the bands shown below (2020/21):

Taxable income
Tax rate
Personal Allowance
Up to £12,500
Basic rate
£12,501 to £50,000
Higher rate
£50,001 to £150,000
Additional rate
over £150,000

What Can You ‘Offset’ Against Tax?

If you own a limited company or you’re self-employed, you can offset some expenditure against tax. This means you reduce your taxable income by deducting certain expenses from it. Generally speaking, you can offset expenditure that is wholly and exclusively for business purposes – for example, accounting, a business phone, and so on.

 To help you understand what you can offset, we have created a handy guide on allowable expenses.

So, that's a basic run-down of income tax for self-employed workers.

Make sure you keep receipts for any business-related expenses, they will come in handy either for your accountant or when doing your Self Assessment tax return. 

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