How Much Can I Earn Self Employed Before Paying Tax in the UK?

January 8, 2025

Being self employed in the UK comes with a range of benefits, including flexible working arrangements. However, it’s essential to understand how much you can earn self employed before you start paying tax. Here’s a detailed guide for the 2025/26 tax year:

1. The Personal Allowance

The Personal Allowance is the amount of income you can earn without paying income tax.

Tax-free income: The first £12,570 of your total income is not taxed.
If your income exceeds this threshold, you’ll start paying tax on the amount above £12,570, based on the tax bands outlined below.

2. Trading Allowance

The trading allowance is a specific tax exemption for self employed individuals and those engaged in casual trade.

If your self-employment income is £1,000 or less in a tax year, you do not need to register for self-assessment or pay any tax on this income.
If your income is over £1,000, you can still claim the trading allowance as a tax-deductible expense.

Example:

If you earn £3,000 from a side hustle, you can claim the £1,000 trading allowance, leaving £2,000 as taxable income.

3. Income Tax Rates for Self Employed Individuals

Once your income exceeds the Personal Allowance (£12,570), you’ll start paying tax according to the following rates for 2025/26:

Basic Rate (20%): Income between £12,570 and £50,270.
Higher Rate (40%): Income between £50,271 and £125,140.
Additional Rate (45%): Income above £125,140.

Example:

If your self employment income is £30,000:

First £12,570 = tax-free.
Next £17,430 (remaining income) is taxed at 20%.

Tax due: £17,430 x 20% = £3,486.

4. National Insurance Contributions (NICs)

Self-employed individuals must also pay National Insurance Contributions (NICs), which are calculated separately from income tax:

Class 2 NICs:

Flat rate of £3.45 per week if your profits exceed £12,570.
This is approximately £179.40 annually.

Class 4 NICs:

9% on profits between £12,570 and £50,270.
2% on profits above £50,270.

Example:

If your self-employed profits are £30,000:

Class 4 NICs: 9% on £17,430 (profits above £12,570) = £1,568.70

Total NICs = £179.40 (Class 2) + £1,568.70 (Class 4) = £1,748.10.

5. VAT Registration Threshold

If your total turnover exceeds £90,000 (as of April 2024), you are required to register for Value Added Tax (VAT).

Even if your taxable profits are below £12,570, meeting the turnover threshold mandates VAT registration.
Keep an eye on your revenue to avoid penalties for late registration.

6. Additional Considerations

Expenses and Tax Reliefs

One way to reduce your taxable income is by claiming allowable business expenses. These include:

Office supplies, utilities, and phone bills.
Travel expenses, including fuel and vehicle maintenance.
Marketing costs, such as website hosting or social media ads.

By deducting these expenses from your income, you can lower the amount of tax you owe.

Self-Assessment Deadlines

It’s crucial to stay on top of filing deadlines:

31st October: Paper self-assessment submission.
31st January: Online self-assessment submission and payment of tax due.

Payments on Account

If you owe more than £1,000 in tax, HMRC may require you to make advance payments for the next tax year.

Example Earnings Breakdown

Scenario: Income of £40,000 (Profits After Expenses)

Personal Allowance: £12,570 (tax-free).
Taxable Income: £40,000 – £12,570 = £27,430.
Income Tax: £27,430 x 20% = £5,486.
Class 2 NICs: £179.40.
Class 4 NICs: 9% on £27,430 = £2,468.70.

Total Tax & NICs: £5,486 + £179.40 + £2,468.70 = £8,134.10.

Key Takeaways

You can earn up to £12,570 tax-free, but remember to include NICs in your calculations.
Use the trading allowance if you’re earning less than £1,000 from casual self-employment.
Track your expenses to reduce your taxable income.
Keep an eye on the VAT registration threshold as your business grows.

For more guidance, consider consulting a tax professional or using an online self-assessment tool to simplify your filing process.