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How much tax should self-employed businesses pay?

There are two types of tax that self-employed businesses pay; income tax and national insurance.
What you will find in this post

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.

How much income tax do self-employed pay?

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%.

What class of national insurance do self-employed businesses pay?

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?

Taxation of self-employed businesses above £100,000 annual income

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 summarize

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:

Upto £6,475

£0

£6,475 – £9,500

£159

£9,500 – £12,500

9%

£12,500 – £50,000

29%

£50,000 – £100,000

42%

£100,000 – £125,000

62%

£125,000 – £150,000

42%

Above £150,000

47%

Get in Touch

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.

About the Author

Bilal Khalid

CEO, Accountant

Bilal Khalid EvoTax accountant

Successfully running my own small business for years has taught me a great deal about the complexities of taxation and I understand all the pain points that every entrepreneur has to go through. I often found myself paralysed with fear of making a mistake and getting fined and eventually decided to take up accounting and finances myself. Today, I help other small businesses suffering through similar mistakes and I am happy to share my knowledge, jargon free!

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