As always, a new tax year brings a new set of tax rates to be aware of. Below we’ll cover the self-employed tax allowance and tax rates for self-employed people in the UK; specifically sole traders.
There are some key changes from 2021-22, especially when it comes to National Insurance Contributions—so it’s definitely worth familiarising yourself with them to ensure you’ve set enough aside for when you do your Self Assessment tax return.
How much can you earn tax-free when you’re self-employed?
Everyone—employed or self-employed—has a Personal Allowance that resets at the beginning of each tax year. This is the amount that you can earn tax-free.
The Personal Allowance for self-employed people in 2022/23 is the same as it was in the last tax year—you’ll only pay tax on anything above the £12,570 Personal Allowance threshold.
As you’ll see in the table, the amount of Personal Allowance you have changes based on how much you earn, and reduces once you earn more than £100,000. Here are a few examples to show you how this works in practice:
- If you earn £18,000 in the tax year, you will have the full self-employed Personal Allowance, meaning you’ll only be taxed on any income over £12,750: £5,430.
£18,000-£12,570 = £5,430
- If you earn £110,000 in the tax year, your Personal Allowance will be reduced by £5,000 (£1 per every £2 over £100,000) to £7,570, meaning your taxable income will be £102,430.
£110,000-£7,570 = £102,430
- If you earn £150,000 in the tax year, you’ll no longer have any Personal Allowance, meaning your whole income will be taxed.
£150,000-0 = £150,000
Trading income allowance
Another self-employed tax allowance to be aware of is the trading allowance. This is £1,000 per tax year that you can use against any income made from self-employment—and the good news is that it can be used as well as your Personal Allowance.
This is particularly useful if you are employed, but have made some additional self-employed earnings (e.g. through a side hustle).
If you earn less than £1,000 in self-employed income, you don't even have to register as self-employed, and don't need to do a tax return. If you earn more than £1,000, you’ll have to do both of those things—but you can use the trading allowance to deduct £1,000 from your income.
If you do choose to leverage your trading allowance, do note that you'll then be unable to claim any other expenses. So if your self-employed expenses end up totalling more than £1,000 at the end of the tax year, you’re better off claiming those instead.
Self-employed Income Tax rates for 2022/23
For sole traders based in England, Wales or Northern Ireland, 2022/23 income tax rates and bands remain the same as they were in 2021/22. All income that you earn over and above your Personal Allowance will be taxed as follows:
If you live in Scotland, different income tax rates apply. Note that the tax bands have changed slightly since the last tax year.
National Insurance rates 2022/23
As a sole trader, in addition to income tax, you’ll also need to pay National Insurance to HMRC. The amount you need to pay depends on your profits (your income minus your allowable expenses). There are two forms of National Insurance to be aware of as a sole trader: Class 2 and Class 4.
There are two significant updates to be aware of when it comes to National Insurance in the 2022/23 tax year:
1. The Health and Social Care Levy, which will increase Class 4 National Insurance Contributions by 1.25%.
2. The 2022/23 National Insurance threshold increases—some of these changes come into effect from April, whilst others come into effect in July. Find out more about this in our Spring Statement summary for self-employed people.
You can find the most up-to-date 2022/23 National Insurance rates and how they change throughout the tax year in the following tables:
Payments on account
One point worth noting is that you may need to make advance payments towards your tax bill when it comes to your Self Assessment for 2021/22—these are known as payments on account and are made twice a year: on 31st January and 31st July.
Each payment is half of your liability from last year’s tax bill. If this is your first year as a sole trader, it is unlikely you’ll have made payments on account before. So for those of you completing your tax return for the first time, it would look a little like this:
Say you’re preparing your Self Assessment tax return for the 2021/22 tax year. You’ve worked as a sole trader for the full tax year, and have no other sources of income. After all calculations are considered, your tax bill comes to £5,000.
Your payments to HMRC will then be broken out as follows:
- Self Assessment 2021/22 balancing payment: £5,000 – due 31st January 2023
- 1st Payment on account for 2022/23: £2,500 – due 31st January 2023
- 2nd Payment on account for 2022/23: £2,500 – due 31st July 2023
So that means that on 31st January 2023, rather than just paying the £5,000 you owe for 2021/22, you’ll be asked for an additional £2,500 as an advance on next year’s tax bill.
However, you won't need to make these payments if:
- your last Self Assessment tax bill was below £1,000
- you’ve paid more than 80% of the tax you owe, for example through your tax code
Value Added Tax (VAT) rates
Once the annual revenue of your company reaches £85,000 within a one year period, you’ll need to register for Value Added Tax (VAT): a tax paid on most goods and services.
Once you’ve registered, you’ll then need to start charging VAT on your sales, but you can also reclaim VAT on purchases.
Should you become VAT-registered?
If you’re under the VAT threshold, deciding whether to become VAT-registered requires a bit of thought, as you have to decide whether to increase your price to charge the VAT onto your customers, or keep the prices the same and pay the VAT yourself—thus reducing your profits.
If your customers are businesses and mainly VAT-registered, it’s easier to charge them VAT, because they’re likely to be able to claim it back. But if your customers aren’t businesses and aren’t VAT registered, the increase in price could have a negative impact on your sales.
Managing VAT is where it can start to get slightly complicated as there are a few different rates and VAT schemes to be aware of. It requires careful record-keeping of all transactions and the rate of VAT they were charged at.
You can find the standard VAT rates outlined below—they have not changed since the last tax year:
Easily stay on top of your taxes
So, there we have it! A summary of the tax rates for self-employed sole traders in the 2022/23 tax year.
With so many things to consider, keeping on top of how much tax you’ll owe when you’re self-employed can be tricky—especially when your income can fluctuate from month to month.
But by using Coconut’s smart tax app to manage your freelance finances, you can easily track all of your freelance income and outgoings throughout the year, meaning you’ll always have an up-to-date view of how much tax you owe. So you’ll be well-prepared for your tax returns, and never be caught out by a surprise tax bill!
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