A common question asked, is how much tax self-employed individuals need to save to pay their tax bill at the end of the year. Often accountants give a complex answer, but we are here to change that. We will break it down into simple steps to make sure you understand what tax band is applicable to you, so your tax bill does not come as a surprise.
Step 1 – Estimate your profit for the year
How, I hear you ask?
- Total up all business income
- Total up all trade related expenses
- Business income less trade related expenses equals your estimated profit for the year
Step 2 – Determine what tax band you fall in based on your estimated profit
There are different rates depending on which tax band you fall in, so it is key that you get this bit right.
| Estimated Profit | Tax band | Rate |
| £0 and £12,500 | Personal allowance | 0% |
| £12,501 and £50,000 | Basic rate tax | 20% |
| £50,001 and £150,000 | Higher rate tax | 40% |
| Above £150,001 | Additional rate tax | 45% |
Step 3 – Apply the rates applicable to your tax band
Now you think it would be easy to work out your tax, right? Multiply your profit by the rates above, but there is a little bit more to it. Don’t worry though, we have given examples below to break it down for you!
Your profit falls between £12,501 and £50,000
In this example the profit is £35,000, but you can follow the same steps substituting your profit figure in. To estimate your tax, follow these steps:
- Profit (£35,000) – personal allowance (12,500) = £22,500
- £22,500 x 20% = £4,500
- Total tax to pay £4,500
Your profit falls between £50,001 and £150,000
In this example the profit is £75,000, but you can follow the same steps substituting your profit figure in. To estimate your tax, follow these steps:
- Profit (£75,000) – basic rate band (£50,000) = £25,000
- £25,000 x 40% = £10,000
- £50,000 – personal allowance (£12,500) = £37,500
- £37,500 x 20% = £7,500
- Total tax to pay = £10,000 + £7,500 = £17,500
Step 4 – Estimate your National Insurance
Self-employed individuals must pay Class 2 and Class 4 national insurance (“NI”).
Class 2 NI
If your profit is above £6,475 you must pay class 2 NI at £3.05 a week. This is equal to £158.60 a year.
Class 4 NI
| Profit | NI rate |
| Up to £9,500 | No NI |
| £9,500-£50,000 | 9% |
| Over £50,001 | 2% |
So, using the same examples as above:
Your profit falls between £12,501 and £50,000
In this example the profit is £35,000, but you can follow the same steps substituting your profit figure in. To estimate your NI, follow these steps:
Class 2 NI
£3.05 x 52 = £158.60
Class 4 NI
- Profit (£35,000) – NI lower profits limit (£9,500) = £25,500
- £25,500 x 9% = £2,295
- You will pay £2,295 of class 4 NI
Your profit falls between £50,001 and £150,000
In this example the profit is £75,000, but you can follow the same steps substituting your profit figure in. To estimate your NI, follow these steps:
Class 2 NI
£3.05 x 52 = £158.60
Class 4 NI
- Profit (£75,000) – NI lower profits limit (£9,500) = £65,500
- £65,500 – NI upper profits limit (£50,000) = £15,500
- £15,500 x 2% = £310
- NI upper profits limit (£50,000) – NI lower profits limit (£9,500) = £40,500
- £40,500 x 9% = £3,645
- £3,645 + £310 = £3,955
- You will pay £3,955 of class 4 NI
Step 5 – Bringing it all together
The last thing you want to do is add your tax, class 2 NI and class 4 NI estimates together, to arrive at your total expected tax bill.
Your profit falls between £12,501 and £50,000
Tax = £4,500
Class 2 NI = £158.60
Class 4 NI = £2,295
Total = £6,953.60
Your profit falls between £50,001 and £150,000
Tax = £17,500
Class 2 NI = £158.60
Class 4 NI = £3,955
Total = £21,613.60
Points of note:
- This is for tax year 2020/2021 and only applies to those with ONLY self-employed income, if you have other forms of income get in touch and we will be happy to advice.
- Your taxable profit will differ from your estimate due to the required adjustments made by your accountant, though this will be a good indication to get you started.
- The above method is not a substitute for using an accountant to file your year end tax return to HMRC. This is because there are multiple factors that will impact your final taxable profit for submission to HMRC.
- The above methods do not work if you earn over £100,000 as you begin to lose your personal allowance, but we don’t want to over complicate things. Feel free to reach out to us if you need help here.
If you follow the steps above, you should get a good indication of how much tax and NI to save, but as always, we are here to help! Please reach out to us if you have any questions.
