There are two types of tax that self-employed businesses pay; income tax and national insurance. These are calculated on the businesses profits between 06th of April to 05th of April.
There are various tax brackets that a self-employed business can fall into.
For the tax year, 06th of April to 05th of April self-employed businesses will pay income tax as follows:
– 0% on the first £12,500 Personal Allowance
– 20% on the next £37,500 Basic Rate Band
– 40% above £50,000 Higher Rate Threshold
So in other words, if your profits have been below £12,500 in a year, you pay zero tax. Anything above £12,500 but below £37,500 you pay income tax at 20%; and once your income tax has reached £50,000 your tax rate increases to 40%.
In terms of national insurance, self-employed businesses pay class 4. They are charged the same way as income tax however in very different profit brackets.
– 0% on the first £9,500
– 9% on the next £40,500
– 2% above £50,000
In addition, there is also a class 2 national insurance which is charged for profits above £6475. This is calculated on a weekly basis, at £3.05 per week. Therefore, in the full tax year for a business earning more than £6475 will pay a grand total of £159 (3.05 * 52) on top of the class 4 national insurance.
Fantastic! This seems very easy. Is there anything else to keep in mind?
The above are the basic tax rates for self-employed businesses. However, you may be wondering, at what point does the 40% tax rate stop and would my business have to pay any more tax if I earned over that threshold.
Well, the simple answer is, that the tax remains at 40% till you reach £150,000, thereafter you will be classed as a higher rate taxpayer. However, it should be noted that if you earn above £100,000 your personal allowance starts to chip away. Every £2 earned above the threshhold, £1 from your personal allowance is reduced.
This means that when you reach £125,000 you can say goodbye to your personal allowance, and say hello to a 60% tax for any earnings between £100,000 to £125,000. This is due to the personal allowance now being charged at 20% plus the 40% tax rate for earnings between £100k – £125k.
Well, just before you thought it was over, there is more! Although you would be pleased to know it’s below 60%. After your personal allowance has completely deteriorated, anything you earn over £150,000 will be charged at 45% tax rate.
To put all this into context, if we combine national insurance and income tax together, we come up with the following table for the tax year 2020/2021:
£6,475 – £9,500
£9,500 – £12,500
£12,500 – £50,000
£50,000 – £100,000
£100,000 – £125,000
£125,000 – £150,000
If the above still feels complicated, feel free to get in touch with EvoTax. We will happily help you to calculate your self-assessment tax returns in the most efficient manner.