Self-employed income tax, National Insurance and VAT

What is self-employed income tax?

If you're self-employed, you'll pay income tax in a different way to employed workers, as it's charged on your profits rather than your gross income via a self-assessment tax return.

To work out the correct figure, you need to deduct your business expenses from your income - this includes both business expenses and larger capital allowances. You can also deduct any losses carried over from previous years.

The resulting amount of profit is what you'll be taxed on.

• Find out more: self-employed capital allowances. See what you can claim as tax-deductible.

Need help with your tax return?

Send your tax return to HMRC using the service provided by GoSimpleTax.

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What are the self-employed income tax rates for 2024-25?

When it comes to paying income tax, there aren't any differences in the tax rates you pay compared with employees.

You can use our income tax calculator to find out how much you'll pay.

In 2024-25, self-employed workers and employees pay:

• 0% on the first £12,570 you earn.
• 20% on income between £12,571 and £50,270.
• 40% on income between £50,271 and £125,140.
• 45% on income over £125,140.

The threshold for basic and higher rate tax bands is unchanged from 2023-24, though the additional rate threshold was lowered from £150,000 to £125,140 in April 2023. 

Scottish income tax bands, rates and allowances are different.

• Find out more: UK income tax rates in 2024-25 

National Insurance for the self-employed

If you're self-employed, you'll need to make National Insurance contributions (NIC) on your profits when you earn above a certain amount.

Just as with anyone who works for an employer, building up NIC over your working life entitles you to the state pension, plus other benefits. Self-employed people, however, pay a lower rate compared with employees. 

The main types of NIC you may have to pay are Class 4 or Class 2.

• Class 4: This rate has been cut for the 2024-25 tax year. It's now payable at 6% (down from 9%) on earnings between £12,570 and £50,270, and 2% on earnings over this threshold.

• Class 2: This has now been scrapped, and replaced with a credit for self-employed workers earning over £6,725. If you earn under £6,725 you won't get the credit, but you can still opt to buy Class 2 contributions voluntarily at a cost of £3.45 a week in 2024-25.

Voluntary National Insurance

If you earn below the threshold to pay Class 4 NI, you may choose to make these contributions anyway at the same rate.

This will allow you to avoid gaps in your payment history, as these gaps may mean you won't have enough years of contributions to get the full state pension.

Alternatively, you may choose to make voluntary Class 3 contributions, though the rate tends to be higher and you may not qualify for certain benefits. You can find out more in our guide to topping up your state pension.

• Find out more: National Insurance and benefits - which benefits are linked to each type of contribution?

National Insurance calculator 2024-25

Use our National Insurance calculator to discover how much you'll pay in each tax year - simply select the tax year you want from the dropdown list.

The calculator makes standard assumptions about employed and self-employed people to estimate your tax breakdown. So bear in mind that what you will take home also depends on other factors such as your pension contributions and student loan repayments - and can vary depending on your tax code.

N.b. To find out your total bill for 2022-23 you will need to check what you will pay between 6 April and 5 July, between 6 July and 5 November, and between 6 November and 5 April and add the three figures together.

Your National Insurance questions answered

Self-employed VAT returns

Value Added Tax (VAT) is a tax charged on traders that they recover from their customers, and must declare in a regular VAT return to HMRC. The VAT rate that businesses charge depends on what goods and services they sell.

You charge VAT to whoever is buying your goods and services, and you must then hand it over to HMRC in a VAT return - these are usually done quarterly.

You must register for VAT with HMRC if your business' VAT taxable turnover - i.e. the total value of everything you sell that isn't exempt from VAT - is more than £85,000 in 2023-24 or £90,000 from 1 April 2024.  

Even if your business turnover doesn't exceed that amount, it can be a good idea to voluntarily register for VAT because you can claim the VAT tax back on purchases you make in order to run your business.

You can register with HMRC online - this will create a VAT online account which you'll need to submit your VAT return.

How much VAT should I charge?

VAT rates vary depending on the goods and services being sold. The current rates of VAT are outlined in the table below.

The full list of VAT notices can be found on the HMRC site.

When charging VAT you must always do the following:

• Charge the correct rate of VAT

• Show the VAT information on your invoice

• Show the transaction in your VAT account - this is a summary of your VAT

• Show the amount on your VAT return

HMRC may charge you interest if you've reported and paid less VAT than you owe. Equally, if you pay too much VAT you can claim it back and may be entitled to interest on top.

When do I have to make a VAT return to HMRC?

You usually submit a VAT return every three months. If you're registered for VAT, you must submit a VAT return even if you have no VAT to pay or reclaim.

If you've signed up for Making Tax Digital (MTD) - which is now compulsory for all VAT-registered businesses, regardless of their turnover - you won't be able to submit your VAT return via your online tax account. Instead, you must record and submit your VAT figures using MTD-compatible software.

HMRC has a list of compatible software providers online, and you can choose whichever service suits your business best.

If HMRC doesn't receive your VAT return or your full VAT payment by the deadline, a 'default' will be recorded.

This means you may then enter a 12-month 'surcharge period'. This is like a warning as you won't get asked to pay a surcharge on your first default.

However, if you default again within this surcharge period you may have to pay an extra amount on top of the VAT you owe, and the surcharge period will be extended by another 12 months.

What is the flat-rate VAT scheme?

If your turnover is less than £150,000 it could be worth considering the flat-rate VAT scheme.

Under this scheme, you pay a fixed rate of VAT to HMRC and keep the difference between what you charge your customers and pay to HMRC.

Your flat rate depends on your business type, and you'll get a 1% discount in your first year as a VAT-registered business.

However, you can't reclaim the VAT on your purchases - except on certain capital assets over £2,000.

This reduces admin and can be good value for small businesses.

Submit your 2023-24 tax return with Which?

Tackle your 2023-24 tax return with the tax calculator service from GoSimpleTax. It can help you to tot up your tax bill, get tips on where to save and submit your return directly to HMRC.