With self-employment in the UK at its highest level since records began over 40 years ago and growing, one of the most common questions we get asked by people considering leaving their employment to work for themselves is “how much tax will I save?” or “how much will I need to earn as a freelancer to match my current salary?”.

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We will show some comparative figures further in this article but first of all we want to explain how the tax system works for self-employment. When you trade as self-employed this is also called being a “Sole Trader”.

Income Tax

Income tax works in the same way as employment income and for the 14-15 tax year you are taxed as below for any of your self-employed / freelance earnings. This is assuming that you are entitled to the standard tax free allowance

  • £0 to £10,000 : no tax
  • £10,000 to £41,865 : 20% income tax
  • £41,865 to £150,000 : 40% income tax
  • £150,000 + : 45% income tax

A couple of other tax factors to be aware of:

  • Between £100k and £120k of earnings your tax free allowance which is £10,000 is withdrawn by £1 for every £2 you earn over £100,000 so once you hit £120,000 has been withdrawn completely.
  • If you earn over £50,000 and receive Child Benefit and you are a higher earner than your spouse / partner, any child benefit received is withdrawn by 1% for every £100 you earn over £50,000, so by £60,000 is withdrawn completely. An example of this is shown here.
  • If you have a student loan then for any earnings over £16,910 you will have to pay 9% as a student loan repayment – if you are employed this will be taken through your payslip but if you are self-employed this will be paid through your tax return.

National Insurance

When you are employed National Insurance works as per the below for the 14-15 tax year:

  • £0 to £7,956 of earnings : 0%
  • £7,956 to £41,860 : 12%
  • £41,860 + : 2%

When you are self-employed, there are two types of National Insurance:

Class 4 National Insurance

This is purely based on your self-employed profits (i.e. it is not affected by other sources of income you have).

It is calculated on your self-assessment tax return and is payable at 9% of profits between £7,956 & £41,865 and 2% for any profits above this.

Class 2 National Insurance

This is paid directly to HMRC (not as part of your tax return).

It can be paid by monthly direct debit and it is charged at a rate of £2.75 per week if your business profits are above £5,885. If your profits are less than this there might be scope to defer paying this National Insurance by applying for an exemption certificate.

Profits vs Earnings

One of the key differences between self-employment and employment is that in self-employment you are taxed based on your “Profits” not your earnings. Put simply, your self-employed profits will be your invoices raised to clients less any business expenses – for an overview of some of the main business expenses for freelancers please see our article here. The ability to reduce your taxable profit by offsetting allowable business expenses is the key driver to paying less tax when you are self-employed.

Comparison between Employment and Self-Employment

Below we have outlined a comparison table that compares the take home pay of gross salary levels from £20,000 to £50,000 per annum. We have assumed tax allowable expenses of £3,000 for the self-employed scenario and that these expenses are already being incurred when employed i.e. they are not additional costs for the person.

This table is a very simplified scenario where the persons only income in the tax year is the employment income or self-employment income and is to be used for indicative purposes only.

Click here to view a PDF document of the comparison table.

This documents outlines the scenario of Self-Employed vs Employed – depending on your earnings level and situation a Limited Company could see further substantial tax savings but there are also non-tax differences of a Limited Company to consider.

if you are considering moving to self-employment from employment then there are many other factors to consider as well as tax / take home pay, including flexibility of working, control of your work and security of income. Each persons scenario is unique and we would advise you to not only talk to an accountant such as us but to also discuss this with people you know who are self-employed already.