Question:

“I have recently started self-employment as a freelance copywriter. I expect to be earning roughly £30,000 per year with about £5,000 of expenses. Can you help me understand what a normal full years tax bill is likely to be and also any National Insurance I will need to pay. I don’t have any other income but I do have a student loan which I believe I will have to start repaying.”

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Answer:

All calculations below are based on the rates for the 14-15 tax year.

Based upon business profits of £25,000 (turnover less self employed expenses) a full years tax and national insurance bill for the 2014-15 tax year would be £4,533.96.

This would consist of the following:

  • £3,000.00 in personal tax – being all amounts over the personal allowance (£10,000 in 2014-15) taxed at 20%. The higher tax rate of 40% kicks in once your earnings go over £41,865
  • £1,533.96 of Class 4 National Insurance – being 9% of all business profits over £7,956. Once your profits go over £41,865 Class 4 NI is calculated at 2%.

The above would be payable on the 31st January 2016 – furthermore you would have student loan liabilities of £728 due on the same date. The student loan amount is calculated as 9% of any earnings above the 14-15 threshold of £16,910.

As a self-employed individual you will also be liable to class 2 national insurance which is usually taken monthly as a direct debit at £2.75 per week – this should have been set up when you registered as self-employed with HMRC.

When you are trading as self-employed you also have to make payments on account for the following tax year. This is normally 50% of the tax and Class 4 NI owed, paid at both 31st January and 31st July. Please see our article here for further discussion of payments on account.