Whilst you'll not need to pay your tax for a little while yet - it's essential to understand what tax you'll be paying, and start to put it aside, so you don't end up with a surprise bill.
Understand the taxes you’ll be paying now, so you can start to put funds aside, ready to pay them later.
Now you’re self-employed, you’ll be responsible for paying your own taxes via self-assessment, rather than PAYE.
Instead of paying your taxes monthly from your salary, you’ll be paying your taxes AFTER your entire financial year has been completed, and once your profits have been calculated.
This means there’s likely to be a lump sum payment due, which, unless you’re putting a little money aside every month, you might not be able to afford.
Understanding what taxes are likely to be due is critical, so you can put money aside for them today, rather than worrying about it later.
Generally, most self-employed individuals will be liable to pay:
You might also be required to pay
It might seem overwhelming, but the guides from gov.uk and moneyhelper are very clear.
If you prefer reading - we recommend this guide as a starter: MoneyHelper
If you prefer a video - we recommend this video: Heelan Associated
Using the goals and ambition setting you did in the earlier tasks, based upon your estimated turnover (i.e. the total amount you expect you might bill this year), estimate how much you’ll be paying in taxes.
You can use the Government’s calculator to estimate your liability, or work with your accountant or accounting software to keep track of what tax and national insurance contributions you might need to pay.
This will give you a rough idea of how much you might need to pay, so you are better informed about the size of your potential tax bill.
It’s useful to set up a spreadsheet or use a tool like FreeAgent to keep track of your estimated tax, so you can update it as your business grows.
It’s sensible to be putting aside at least 25% of each payment (or up to 50% if you’re a higher tax rate payer).
Many digital bank accounts allow you to keep money in “pots”, or you could potentially open an additional bank account purely for your tax contributions.
Keeping this money in a seperate pot helps you to keep track of how much you’ve got avaiable to pay your taxes.
There’s another task coming soon to explain this this, but you might need to pay your tax in advance of even earning money! There’s no harm in putting more money than you need to in a tax pot - the worst case is you’ll have left over profit at the end of the year.
The UK Tax year runs from April to March, so come April 5, you’ll receive a letter to complete your tax return.
You’ll then have until January 31st after that, to pay your taxes.
If you’re not already registered for Self Assessment, you should do that as soon as possible - so it’s done, and you won’t have to worry about it later.
There are fines and penalties if you don’t register or if you pay your taxes late, so it’s worth the effort.
Put some dates in your calendar now - so you’re reminded when you come closer to the tax return and payment deadlines.
We’ve added a few headline notes on the various forms of tax you’ll be paying, but use the resources to ensure you’re understanding your obligations.
The details we’ve provided below are accurate as of August 2024, but are subject to change. Make sure you’re keeping on top of any changes.
Almost everyone in the UK will be liable to pay income tax - and if you’re a sole trader, this is how you will be taxed on your business earnings.
You pay income tax on any taxable profits your business makes, that’s the money which is left over once you’ve deducted any business expenses.
The amount of income tax you pay will depend on how much profit your business has made within the tax year.
You’ll pay 0% on profits up to £12,570 - this is your personal allowance.
You’ll pay 20% (Basic Rate) on your profits up to £50,270
You’ll pay 40% (Higher Rate) on the next amout of profit up to £50,270
You’ll pay 45% on profits over £125,140
The amount of income tax you pay on your trading profits is the same as if you were employed.
You can estimate how much income tax you’ll be due to pay, using the Government’s calculator
It’s important to note, if you have other sources of taxable income (i.e you’re also employed), this is all treated as a single income, when you’re a sole-trader.
Almost everyone in the UK pays National Insurance contributions (NICs), including the self-employed.
Again, National Insurance contributions are based upon your company’s trading profits.
If you’ve registered a limited company, things are different. The company itself will pay National Insurabce contributions as an employer, and you will also pay National Insurance contributions on your director’s salary.
If you’re a limited company, you’ll also be paying Corporation Tax on your profits - which is currently 25% (or 19% for companies with profits below £50,000)
If your turnover is over £90,000 (or if you choose to voluntarily register), you’ll also need to be charging your customers VAT, and paying that tax on to HMRC. VAT-registered businesses will generally submit and pay their VAT quarterly.
It can be a lot - so take this task a little bit at a time, and don’t worry if you don’t get it all done in one go.
You have a few months before you need to complete your tax return, so as long as you’re starting to put money aside, you should be good!
“Taxes don’t have to be taxing” - but they can feel like they are!
You might want to consider working with an accountant in the first few years of your business, to make sure you’re paying the correct taxes, and not missing any deadlines.