Self-employed workers have to pay income tax and National Insurance contributions on their earnings. Here’s what you need to know about tax if you're self-employed

If you work for yourself as a sole trader or a freelancer then you are self-employed when it comes to paying the tax you owe. Depending on how much you earn, you may have to pay both income tax and National Insurance contributions. If you have just started working for yourself, the first step is to register as self-employed with HMRC.

How much income tax do self-employed workers pay?

Rates of income tax are the same for self-employed workers and employees but if you work for yourself, the way that you calculate and pay the tax you owe is different. While employees pay tax as they earn under the PAYE system, self-employed workers must complete a self assessment income tax return in January every year. Self-employed tax payments must be paid twice a year - on 31 January and 31 July.

Income tax is only paid if you earn over a certain amount; this threshold is called the personal tax allowance.

What is the personal tax allowance?

In the UK, you don't pay tax on earnings under the personal tax allowance.

• The personal tax allowance is £12,570 - and that threshold has now been fixed until 2025/26.

However, if you earn over £100,000, your income tax personal allowance goes down by £1 for every £2 earned above £100,000.

What are the UK income tax bands?

Tax payers (including the self-employed) pay income tax at specific tax rates on earnings within specific income bands. Income tax bands can change from one year to the next.

UK income tax rates and bands are:

• 0% tax on income up to the tax threshold of £12,570
• 20% tax on earnings between £12,571 and £50,270
• 40% tax on earnings between £50,271 and £125,140
• 45% on earning over £125,141

How to pay less tax if you're self-employed

As a self-employed worker, you only pay tax on your profits - not on your total earnings. It means that you can deduct allowable business expenses from your income before you pay tax. These costs must be business-related.

What are allowable business expenses?

Allowable business expenses include:

• Office expenses such as phone and internet, software, stationery and postage;
• Stock and materials;
• Marketing costs;
• Costs associated with running a business from your home such as a share of utility bills;
• Business premises, including rent, building insurance and utility bills;
• Business travel costs including car insurance and fuel as well as train, plane and bus tickets and taxi costs. Business travel does not include costs associated with getting from home to work and back;
• Accountancy costs, bank fees, overdraft charges and legal bills;
• Business insurance.

The government publishes guidance on business expenses; it also offers simplified expenses schemes for self-employed workers if you work from home, run a vehicle for your business or live in your business premises.

What if self-employment is not your only income?

You have to pay tax on all kinds of income earned during the tax year. That includes any wages earned as an employee as well as any profits you make from self-employment. You also need to declare any income from pensions, rental income, trust income and interest from savings on your self assessment tax return.

How much National Insurance do self-employed workers have to pay?

The amount of National Insurance and the rates and the rates you have to pay changed on 6 April 2024. Before this date, the self employed paid two types of National Insurance contributions (NICs) - Class 2 and Class 4 contributions. Class 2 NICs have now been abolished (previously they were payable at a flat rate of £3.45 a week on annual profits above £6,725).

Class 4 NICs are payable on yearly profits over £9,569. Class 4 tax rates and thresholds for 2024/25 are:

• 6% on profits between £12,570 and £50,270 (previously 9%)
• 2% on profits over £50,270

National Insurance contributions are paid at the same time as imcome tax as part of your self assessment tax return.

Want to start or expand your business but don’t have enough funds? A business loan could be the answer but it’s important to find the right loan for you. Here are some of the main options

There are many ways for a small business or sole trader to borrow money. It’s important to find an appropriate lending solution that does not become a burden that you can’t manage. Never forget that borrowing could put your business or personal assets at risk.

What is a business loan?

A business loan is a way of borrowing money to help your business grow or to get a start-up off the ground. Potential lenders include high street banks, online lenders and peer-to-peer lending platforms. Business loans typically start at £1,000 and can be several million pounds. Loans can be short-term (from just a few months) or long-term (up to 25 years). Interest rates are likely to be lower if the loan is long-term but as you are repaying the loan for longer you could end up paying more.

No matter what kind of business loan you are looking for, lenders will want to know what the loan is for; they will ask to see evidence of your income as well as details of how you plan to repay the loan.

Most loans work on the basis that you will repay the loan with a fixed interest rate over a fixed period of time. However, there could be penalties for missed payments or for repaying early. You can use a business loan calculator to work out the final cost of a loan before you agree to the terms.

How can a business loan help your business?

It’s often said that you need to spend money to make money. Of course, that is not always the case - many entrepreneurs start a business with little or no money. However, many others have to borrow to get the funds they need to create a viable business or to invest in a business that has potential for growth.

Common reasons to take out a business loan include:

• to get a new business off the ground;
• to expand a business;
• to buy more stock;
• to take on new employees;
• to move premises or invest in new equipment;
• to invest in new technology or a marketing campaign;
• to help with cashflow.

How do business loans work?

Most business loans work on the basis that you borrow an agreed amount of cash and pay it back over an agreed term with interest. This arrangement is what’s known as a “term loan”.

Another option for businesses is to agree a “line of credit” with your bank which allows you to borrow cash when needed (up to an agreed amount) so you only pay interest on the money you take out. However, if you go over your limit or repay late, extra fees could apply.

When you’re shopping around for a business loan, you’ll need to compare the interest rates and repayment terms offered by different lenders. Interest rates can be fixed or variable. There are pros and cons with each. A fixed interest rate can give you certainty but there may be fees for early repayment. Loans based on variable rates can be more flexible but there’s a danger that rising interest rates will make it harder to repay the loan.

Another important factor is security. Business loans are usually either “secured” or “unsecured”. A secured loan often uses assets as security. If you can’t make the loan repayments, the lender can sell the asset to get their money back. Business assets could include property, stock and machinery. Secured loans typically have lower interest rates than unsecured loans.

Unsecured loans are much harder to get and they are usually more expensive. Banks can also ask for a director’s personal guarantee - if your business is unable to repay the loan, you will be personally responsible for it.

If your business is struggling to get a loan, the government’s Enterprise Finance Guarantee scheme (EFG) could be the answer. EFG facilitates lending to viable businesses that have been turned down for a normal commercial loan due to a lack of security or a proven track record. However, participating lenders will still want to be satisfied that your business can afford the loan repayments.

What happens if you can’t pay back a business loan?

If you are struggling to repay a business loan and you miss some payments you will almost certainly have to pay late payment fees; you could also be liable for extra interest or administration fees. In the longer term, missing payments could damage your credit rating and make it harder to borrow in the future. If you fail to make a number of payments over several months, you will be seen to have defaulted on your loan. If your loan was agreed with a director’s guarantee, you will be personally responsible for paying back the loan. If you took out a secured loan, then your assets could be seized.

Where can I get a business loan?

There are more options than ever when it comes to business borrowing. It’s always worth approaching your business bank first as you already have a relationship with them.

As well as the high street banks, there are plenty of other small business lenders. You can use Nerdwallet's business loan comparison tool to find out what many of the leading providers offfer. 

Another option is peer-to-peer lending platforms (P2P) that match businesses that need funding with private investors looking to invest. Applications are made online and the process can be quicker than a traditional bank; lending could come from one person on the platform or from a pool of people. In other respects, P2P lending is no different from a bank loan - the lender earns interest on the loan and the small business pays it back within the agreed timeframe.

How can I maximise the chances of being accepted for a business loan?

A detailed business plan is absolutely key - backed up by evidence including company accounts, cash flow projections and realistic sales forecasts. If you use accounting software it’s easy to share financial reports with potential lenders. You may also need to show bank statements and tax returns.

You’ll have to explain why you want the loan and show how you intend to pay it back. Lenders will also ask about you and your management team, as well as investors. They will want to know how much equity you have in the business. Above all, remember that lenders are looking for a solid business that will deliver steady income.

Do I need a good credit rating to get a business loan?

Yes, lenders will look at your personal credit score to see if you have a good track record on managing finances. In fact, every member of your leadership team will need to have a rock-solid credit history. Your track record in business will also be a key deciding factor. If you run a limited company, your personal credit record will include the company accounts filed at Companies House.

How can I get a business loan as a start-up?

It can be difficult to get a loan for a new business because most lenders want to see at least two years’ of business accounts. One option is to take out a personal loan to start a business. A personal loan will be in your name; if you have difficulties paying it back it will affect your personal credit rating.

You can also apply for a government-backed Start-Up loan. The government start-up loan scheme offers loans of £500 to £25,000 to start or grow a business. It is not a business loan, but an unsecured personal loan. However, it comes with free guidance to help you write a business plan, and successful applicants get 12 months of free mentoring. Applicants must be over 18 and have (or plan to start) a UK-based business that’s been fully trading for less than 24 months. Start Up Loans charge a fixed interest rate of 6% per year. You can repay the loan over a period of one to five years; there’s no application fee and no early repayment fee.

As a business, you want to be able to accept payments and to do so in the ways that your customers prefer to pay. You need to understand the costs and risks of different payment methods, and what your business needs to do to be ready to accept these payments. Here’s our overview of the main payment options used for retail, online and business-to-business sales.

Accepting card payments

Most consumers now pay using debit or credit cards, or modern alternatives such as contactless payments using a smartphone. Contactless payments can be particularly quick and easy for payments up to £100, as these don’t usually require the card holder to key in a PIN number.

If you sell to consumers, you probably want to be able to accept card payments – but you’ll need to invest time and money in getting set up.

The best option for most smaller businesses is to work with an all-in-one payment services provider. A company such as Square can provide the equipment you need (for example, a card reader),  take care of processing payments made using any of the major credit or debit cards, and collect the payments for you. You typically pay a one-off cost for equipment and then transaction fees as a percentage of the amount.

If your business expects a higher level of card payments – at least £100,000 per year – it may be worth looking at other options. Opening your own ‘merchant account’ (rather than using an all-in-one provider’s account to collect payments on your behalf) can be a more cost-effective solution. As well as meeting turnover requirements, you’ll usually need to have a good credit rating.

It’s important to understand that card payments are not guaranteed. A payment can later be reversed (a chargeback) if the customer disputes it or it turns out to be fraudulent (for example, made with a stolen card).

Accepting payments online

Most online payments are made using cards. As with face-to-face payments, you can use a payment services provider to handle the payments. You may want to consider options such as PayPal Checkout, which allows customers to pay with PayPal as well as with their debit or credit card.

Again, if you expect a high value of online sales, you may want to shop around for different solutions. Before committing to any solution, make sure you understand what is involved in integrating the payment solution into your website.

Cash payments

If you run a shop, hospitality business or any other business where you are selling to the public, you’ll probably want to be able to accept payment by cash. Although you are not legally obliged to accept cash and many customers now prefer contactless payments, cash is still widely used, particularly by older consumers and people who don’t have bank or credit cards.

Cash has advantages, particularly when you are selling to someone you don’t know. Once you have the cash, you are safe in the knowledge that you’ve been paid. But there are issues you need to manage:

• You need some sort of physical till and a ‘float’ of cash for giving customers change. You’ll want to count the money and balance the till on a daily basis.
• Employees need to understand how to use the till and work out the correct change. You’ll also want to be able to detect any forgeries.
• Cash puts you at greater risk of theft by staff or robbers. You should make sure your insurance covers this.
• You’ll need somewhere local that you can bank your cash, and a safe procedure for getting cash there – for example, never carrying large amounts of cash alone.
• Bank charges for dealing with cash are higher than for electronic payments.

Payment by cheque

Cheques have largely been replaced by cards and online payments, but remain a preferred payment method for some customers.

Cheque payment may suit you if you make a small number of relatively high-value sales, as bank charges for handling cheques are generally a single flat fee per cheque rather than a percentage of the value.

Unlike cash, however, cheques do not guarantee payment. A bank can refuse to honour a cheque up to six days after the cheque has been paid into your account – for example, if it turns out that the cheque is a forgery or the customer doesn’t have enough money in their account.

Bank payments

As a supplier, bank payments are probably the best payment method. Rather than writing a cheque, the customer instructs their bank to make a payment direct to your bank account. Bank fees for receiving payments like this are low or zero, and payments typically reach your account very quickly (once the customer instructs their bank).

If you sell to other businesses, there is very little you need to do to accept this kind of payment, other than making it easy for your customer by including your bank account details on the invoice. Some accounting software packages now allow you to send invoices that have automatic payment links built in.

All employers (including those taking on staff for the first time) are required to automatically enrol eligible employees into a suitable workplace pension scheme as soon as they start work. The rules are designed to encourage people to save more towards their retirement. However, employees can choose to withdraw from the scheme if they want to.

You can check if you're an employer on the Pensions Regulator website.

Enrol eligible workers into your pension scheme

Employers must enrol eligible workers into a pension scheme. Eligible workers must:

• normally be based in the UK
• be aged between 22 and the state pension age
• have a salary over the automatic enrolment earnings trigger (£10,000)
• not already a member of a qualifying pension scheme

Eligible workers can opt out but must make a positive decision to do so.

If a worker becomes eligible after they have started working for you (for example, they reach 22 or their earnings increase), you must enrol them within six weeks unless they actively opt out.

Every three years employers must re-enrol certain employees - for example eligible employees who left an employer's automatic enrolment pension scheme more than 12 months before the employer's re-enrolment date.

Failure to comply with the rules can result in daily fines, criminal prosecution and even imprisonment.

Other, non-eligible workers aged between 16 and 74 who earn at least £6,240 (entitled workers) have the right to opt into the pension scheme. Employees earning less than this can also join, but the employer does not have to pay pension contributions for these employees.

Choosing a workplace pension scheme

Many businesses opt to use NEST, the pension scheme set up by the government when auto-enrolment was introduced. However, you are free to choose your own scheme providing it meets the qualifying criteria.

There are different types of occupational pension scheme. They offer different levels of risk for you as the employer and a variety of benefits such as death-in-service benefits. It is advisable to take advice from an independent financial adviser. They can help you choose the right scheme for your business and understand the costs involved.

Contributing to your workplace pension scheme

The rules require employers to pay a minimum percentage of each participating employee's wages to be paid into the scheme. You have to contribute a minimum proportion of this amount with employees making up the balance.

Employers must pay at least 3% of 'qualifying earnings' between £6,240 and £50,000 into the pension. Employees must pay at least 5% of their qualifying earnings. The combined minimum total contributions is 8% (3% employer contribution and 5% employee contribution) although both the employer and employee can opt to pay more than this.

Paying pension contributions

You must pay your pension contributions on time. You can be fined if you are late. You must pay pension deductions to the pension scheme provider no later than the 22nd day of the next month (19th if you pay by cheque). There are special rules if you are making your first contribution deductions under auto-enrolment.

To make the pension contribution calculations and deductions easier, it helps to use an automated payroll system or payroll provider.

What happens to the pension when an employee changes job?

Your contributions end when an employee leaves your employment. The pension belongs to the employee and when they leave, they have a number of options:

• They can cease making contributions to your pension scheme. Their money remains invested in the scheme and they can access the funds when they reach the retirement aged specified by your scheme.
• The employee can continue contributing to the scheme.
• The employee can combine the contributions they have made into your scheme with their new employer's pension scheme.

If the employee was contributing to a defined benefit scheme for less than two years, they may be able to get a refund of their contributions or transfer the value to a new pension scheme.

Getting help with auto-enrolment

As an employer, it's likely you will have a number of questions about your role and responsibilities in relation to auto-enrolment.

You can find out about auto-enrolment pension rules for employers on the Pensions Regulator website.

You can also find advice on setting up a workplace pension scheme on the GOV.UK website.

Taking advice from an independent financial adviser can also help you identify a pension scheme for your business.

Most businesses have dedicated business bank accounts, making it easier to keep the financial affairs of the business separate from those of the owner. It can be tempting for the smallest businesses to make do without a business bank account, particularly as business bank accounts often incur charges. But having a business account tends to be worthwhile, and may be a legal requirement.

Sole traders and business bank accounts

If you are a self-employed sole trader, you aren’t legally required to have a business bank account. You could choose to run your business using your personal account – though some banks object to this, and will ask you to open a separate business account if they realise this is what you are doing.

However, there are good reasons why you should have a business account:

• It makes it easier to keep financial records and to check for any errors.
• It’s easier to pull together the information you need for annual accounts and tax returns, and for VAT / PAYE returns (if your business is VAT-registered or has employees).
• You may find it easier to convince HM Revenue & Customs that your records are accurate and that you are paying the correct amount of tax, particularly if your business makes or receives cash in hand payments.
• You have a clearer view of how your business is performing.
• You can get a bank account that uses your trading name. This can create a better impression than using your personal name.

If you have a very limited business income – with annual turnover below the tax-free trading allowance of £1,000 – you will not normally need to register as self-employed, and probably will not find it worthwhile having a separate bank account.

Company and partnership bank accounts

If your business is a limited company, it must have its own company bank account. The company’s financial affairs must be kept separate from those of its owners and directors. The same applies if your business is a limited liability partnership (LLP).

If your business is a traditional partnership – where self-employed partners work together – you could in principle run the business without having a separate business account. But using individual partners’ accounts would be a recipe for confusion, making it difficult to keep track of both business performance and each partner’s financial position.

Having a separate bank account for your company or partnership offers the same advantages as it does for a sole trader. In addition:

• The business bank account ‘mandate’ lets you specify who is authorised to access the account and make payments.
• A business account is essential if you are raising money from external investors.
• Your business account provider may offer additional, useful business financial services – for example, cards for your employees to use for expenses payments.

Using multiple accounts

As well as having a main business current account, you may find it useful to have other accounts. For example, many businesses find it useful to keep a separate tax savings account, into which you can make regular deposits towards future tax payments. This helps prevent the business spending money which it is going to need.

Other circumstances in which you may want to have more than one business account include:

• Keeping client funds in a separate account (or in separate, designated accounts for each client). This is common for professional practices such as law firms and estate agents, and in some cases is required by regulation.
• If you trade internationally. For example, you may want to have separate accounts for different currencies, or local accounts in banks in the countries where your business operates.

If you're a self-employed sole trader, partnership or limited company in the UK, you will need a Unique Taxpayer Reference (UTR) number. The number is unique to the individual or organisation and will never change.

You will also need a UTR if you have other forms of income or expenses that require you to file a self assessment tax return.

What is a Unique Taxpayer Reference (UTR)?

A UTR is a ten-digit reference number, also known as a tax reference. You will be sent a UTR automatically when:

• you register for self assessment
• you start a limited company

You will receive the UTR within 10-working days. Once you have your UTR, you will have to use it for all future correspondence with HMRC. Your UTR will help HMRC identify and process your tax returns against the correct taxpayer’s records.

Why would you need a Unique Taypayer Reference?

If you haven't got your UTR yet, you will be unable to submit your self assessment tax return. Obtaining a UTR can take a couple of weeks. If you don't apply in time, you run the risk of filing your tax return late and there are penalties that can be issued by HMRC for late filing and payment of any tax owed.

Who needs a Unique Taypayer Reference?

You will need a UTR if you need to complete a self assessment tax return. Individuals with self-employed income or income from rental property probably form the biggest group that will need a UTR. However, you will also need a UTR and to complete a self Assessment tax return if you

• are a sole trader earning more than £1,000
• are a partner in a business partnership
• have a total income over £100,000 or have complicated tax affairs
• have an income over £60,000 and either you or your partner receive child benefit
• get income from savings and investments or dividends over £10,000
• have property income over £10,000, or profits over £2,500
• need to pay capital gains tax on assets you have sold
• are a religious minister, Lloyd's underwriter, examiner or share fisherman

For other taxpayers, it may also be relevant when registering for the Construction Industry Scheme or working with an accountant.

It should be noted that the government have announced some changes to who will need to complete a self assessment tax return starting from the 2024/25 tax year.

How do I get a Unique Taypayer Reference?

You won't receive a UTR number unless you’re registered as either self employed or as starting a new business. You’ll need to do this on HMRC’s website. Alternatively, you can call them on 0300 200 3310. There is no charge for doing either.

Be careful if you have already started trading. HMRC expects you to register within three months of the end of your first month in business. You could be subject to heavy penalties if you fail to do so.

To avoid these fines, register as soon as you can. Make sure you have the following information to hand:

• full name
• date of birth
• email address
• home address
• phone number
• National Insurance number
• the date you started self-employment

Double-check that you have completed the process correctly if you do not receive your UTR within 10-working days following your registration.

What if I'm already registered for self assessment?

You should already have a UTR code somewhere. If you’ve misplaced it, start by checking any correspondence that you may have received from HMRC. All previous tax returns will reference it, along with any notices you may have had to file a return, payment reminders or statements of account. You can also find a lost UTR on the GOV.UK website.

In addition, your HMRC online account will also display your reference number, provided you can access it. If none of these options prove fruitful, contact the Self Assessment helpline.

Written by Mike Parkes of GoSimpleTax - tax return software that can help you manage your self-assessment.