A guide to tax for the self-employed

National Insurance for the self-employed

National Insurance Contributions (NICs) help fund things like the State Pension and other public benefits. For sole traders, two types of NIC apply:

• Class 2 NICs: Abolished from April 2024, these were flat-rate contributions of £3.45 per week applied to profits above the Small Profits Threshold (£6,725 for 2023/24). Since April 2024, Class 2 was no longer required, though voluntary payments can still help protect your State Pension entitlement.
• Class 4 NICs: If your annual profits are higher than £12,570 you have to pay Class 4 National Insurance Contributions. These are based on your annual profits:
• 6% on profits between £12,570 and £50,270
• 2% on profits over £50,270

If your annual profits are less than £6,725, you don’t need to pay National Insurance – but you can decide to pay Class 2 NICs. Whether you decide to will depend on your individual circumstances. Here’s more information about voluntary contributions.

How will I pay National Insurance Contributions?

You’ll pay both Class 4 NICs and Income Tax via your Self Assessment. The amount you’ll have to pay is calculated once you submit your assessment, but it’s a good idea to have a running estimate throughout the year. An accountant or bookkeeper can help you keep an accurate record and estimation.

What can you claim as allowable expenses?

Claiming the right expenses can make a big difference to your tax bill as they reduce the amount of profit you’re taxed on. But only business-related costs count.

Some of the most common allowable expenses include:

• Office costs like stationery and phone bills
• Travel costs like fuel, parking and train tickets
• Staff costs like salaries, subcontractor payments and training
• Premises costs like heating and lighting
• Marketing and advertising like website costs, ads, flyers and business cards
• Accountancy or legal fees
• Insurance costs like public liability insurance and professional indemnity insurance.

If you work from home, you can claim a proportion of your home running costs or use simplified flat rates provided by HMRC.

A word of caution: keep detailed records. Receipts, invoices, mileage logs – all of it counts when HMRC comes knocking.

Let’s look at an example

Scenario:

• Self-employed income: £50,000
• Allowable expenses: £10,000
• Taxable profit: £40,000
  

Step 1: Apply Income Tax

Taxable profit: £40,000

• Personal Allowance (tax-free): £12,570
• Remaining amount taxable: £40,000 − £12,570 = £27,430

Tax on £27,430 falls entirely within the basic rate (20%):

• £27,430 × 20% = £5,486

Income Tax owed: £5,486

Step 2: Apply National Insurance (Class 4 NICs) 

Class 4 NICs are:

• 6% on profits between £12,570 and £50,270
• 2% above £50,270 (not relevant here since profit is £40,000)

So:

• Profit between £12,570 and £40,000 = £27,430

NICs:

• £27,430 × 6% = £1,645.80

Class 4 NICs owed: £1,645.80

Final tax bill summary