How Does the Self Assessment Tax System Work?
Self Assessment is the system HMRC uses for collecting tax from self-employed individuals. It’s based on the principle that you report your own income. The tax year runs from April 6th to April 5th the following year.
You’ll need to complete a tax return annually reporting all your income and expenses. Accuracy is crucial to avoid HMRC investigations. Tax returns can be submitted online or via paper forms.
You’re responsible for calculating and paying your own tax and National Insurance, including ensuring you pay your self assessment. This is perhaps the biggest difference from employment.
Payments are typically due on January 31st and July 31st each year. It is important to pay your Self Assessment tax bill by these deadlines to avoid penalties. Have you set calendar reminders for these important tax dates?
During my first year at Pie Tax, I was surprised to learn clients needed to save receipts for even small business purchases – these deductions ended up saving them hundreds in tax.
What Tax and National Insurance Do Self-Employed People Pay?
Self-employed individuals pay Income Tax on their profits, not their total income, a crucial distinction many new business owners might overlook.
For the 2024/25 tax year, you'll pay Class 2 National Insurance if your profits exceed £6,725.
Class 4 National Insurance is due on profits above £12,570. The rates are 6% on profits between £12,570 and £50,270, and 2% on profits above that.
You receive the same Personal Allowance as employed individuals, which is £12,570 for the 2024/25 tax year. Income Tax rates remain unchanged: 20% (basic rate), 40% (higher rate), and 45% (additional rate), applying to different bands of your income.
Unlike limited companies, self-employed individuals don't pay employers' National Insurance.
For example, a client of mine was surprised to find that his effective tax rate was lower when self-employed than when employed, once legitimate business expenses were deducted from his taxable profit.
