Details for Employed and Self Employed
To work out tax, National Insurance and Student Loan deductions for the Employed and Self Employed the UK Government's latest tax information from the April 2023 budget is used. Below are details of the figures used.
Income Tax
| Standard Allowances | |
|---|---|
| Personal Allowance | £ 12,570 |
| Overall income limit | £ 100,000 |
| Additional Allowances | |
| Blind Allowance | £ 2,870 |
| Married rebate | £ 1,037.50 |
| Tax Bands | |
| (on taxable income after allowances) | |
| £ 0 - £ 37,700 | 20 % |
| £ 37,700 - £ 125,140 | 40 % |
| Over £ 125,140 | 45 % |
| Scottish Tax Bands | |
| £ 0 - £ 2,162 | 19 % |
| £ 2,162 - £ 13,118 | 20 % |
| £ 13,118 - £ 31,092 | 21 % |
| £ 31,092 - £ 125,140 | 42 % |
| Over £ 125,140 | 47 % |
Income tax is calculated using your gross income - i.e. your salary from employment plus your profit from self-employment. There is a personal allowance below which you pay no tax - this is £12,570. Anyone earning more than £100,000 per year will have their personal allowance reduced by £1 for every £2 over that threshold until the personal allowance reaches zero. Your tax free personal allowance may be different from these standard allowances if your tax code instructs it to be different - see the section on tax codes below.
Additional allowances are available if you are registered as blind or are over 88 and married. The blind receive a further allowance of £2,870 and those over 88 and married receive a rebate, after other deductions, of £1,037.50. This rebate can be reduced, if your income is sufficient, to £401.
Tax bands are applied to taxable income (i.e. after the allowance has been deducted) so that as you earn more money, you pay a higher rate of tax. On the first £37,700 of taxable income, you pay 20% tax. Between £37,700 and £125,140 you pay 40% tax, and above £125,140 you pay 45% tax.
Those living in Scotland pay different tax rates, set by the Scottish government. In Scotland, you will pay 19% on the first £2,162 of income over the personal allowance. From £2,162 to £13,118 the tax rate is 20%. From £13,118 to £31,092 the tax rate is 21%. From £31,092 to £125,140 the tax rate is 42%. Anything earned over £125,140 is taxed at the maximum 47%.
Tax codes are used by HRMC to tell your employer that you should have a different personal allowance from the standard allowances listed above. This often happens because you are receiving other taxable benefits from your employer, such as private healthcare or a company car. Usually, this has the effect of reducing your allowance and therefore increasing the tax you pay. Most tax codes indicate the new personal allowance with a number which should be multiplied by 10 to give the new allowance. The tax code 1257L would give the standard personal allowance of £12,570.
- L, P, T, Y, M and N codes indicate the new personal allowance as described above
- K codes indicate that taxable income should be increased, usually to collect additional tax
- BR code means that you pay the Basic Rate (20%) on all income.
- D0 code means that you pay 40% tax on all income.
- D1 code means that you pay 45% tax on all income.
- NT code means that you pay no tax
From April 2016, tax codes can start with the letter S, which indicates that you pay the Scottish Rate of income tax. Scottish tax rates are described above.
National Insurance
| Class 1 Code A | |
|---|---|
| £ 0 - £ 242 / week | 0 % |
| £ 242 - £ 967 / week | 12 % |
| £ 967 and above | 2 % |
| Class 2 | |
| £ 0 - £ 6,725 / year | £ 0 |
| £ 6,725 and above | £ 3.45 / week |
| Class 4 | |
| £ 0 - £ 12,570 | 0 % |
| £ 12,570 - £ 50,270 | 9 % |
| £ 12,570 and above | 2 % |
National Insurance can be complicated if you are both employed and self-employed, as income from self employment has National Insurance deducted at a different rate from income from employment. National Insurance is separate from income tax but is also calculated depending on how much you earn. Class 1 contributions are based on your income from employment only - not self-employment. Conversely, Class 2 and Class 4 contributions are based on your profits from self-employment, not your employed income.
You may not pay any National Insurance - for example, if you have reached state pension age. If this applies to you, the "No NI" option will mean that none of the different National Insurance Contributions described below will apply to you and NI will be £0.
Employment National Insurance - Class 1
Most employees will have NI Code A applied, with the band A rates and thresholds applied. If your total income, before tax, is less than £242 per week you will pay no National Insurance contributions. Between £242 and £967 per week you will pay 12%. Above £967 per week you will pay 2%.
Self Employment National Insurance - Class 2 and Class 4
Class 2 National Insurance is charged at a flat rate of £3.45 per week. Previously this was collected throughout the year but now it is paid along with your other tax when you do Self Assessment. If your profits for the year are under £6,725, you do not need to pay Class 2 contributions - however, you may choose to do so on your tax return to ensure you remain eligible for NI-related benefits, such as the state pension.
Class 4 National Insurance depends on the annual profits of your self-employment. Below £12,570, you make no contributions. Above £12,570 and up to £50,270 you pay Class 4 at a rate of 9%. Above £50,270 you pay additional Class 4 contributions at a rate of 2%.
However, if you are both Employed and Self Employed, Class 4 contributions can get more complicated. Because those who are employed and self employed at the same time would otherwise pay a lot of National Insurance at the normal rates (12% for employment and 9% for self-employment), HMRC will take into account the amount of Class 1 National Insurance you paid through your employment when working out the Class 4 National Insurance you owe. You used to have to apply for "deferment" of Class 4 NICS but this is no longer necessary.
If you did not apply for deferment in time, it is possible to apply for a refund of overpaid National Insurance, although not normally until the February after the end of the relevant tax year (e.g. February 2024 for the 2022 / 23 tax year). As mentioned above, details of National Insurance refunds are on the HMRC website.
Employer National Insurance
| Employer's NI | |
|---|---|
| £ 0 - £ 9,100 | 0 % |
| £ 9,100 and above | 15.05 % |
| Employers NI credit | £ 5,000 |
If you have a limited company, the company will have to pay employer's National Insurance contributions on any salary you pay yourself. Employer's NI is calculated at a rate of 15.05 % of any salary over £ 9,100. Introduced from April 2014 is an NI credit of £ 5,000 for qualifying companies to reduce their NI bill.
Student Loans
| Plan 1 | |
|---|---|
| £ 0 - £ 22,015 | 0 % |
| £ 22,015 and above | 9 % |
| Plan 2 | |
| £ 0 - £ 27,295 | 0 % |
| £ 27,295 and above | 9 % |
There are now two ways to repay your Student Loan. If your course started before 1st September 2012, you will repay under "Plan 1", which is the same as the previous repayment method. If your course started on or after 1st September 2012, "Plan 2" repayment applies to you. Plan 1 repayments are made at the rate of 9% of all income (i.e. employment income plus self-employment profit) over the income limit of £22,015. Plan 2 repayments are made at the rate of 9% of all income (i.e. employment income plus self-employment profit) over the income limit of £27,295. These deductions will continue to be made until HMRC receive instruction from the Student Loans Company that you have paid off the full amount of your loan. In some cases it is possible that you might continue to have deductions made even after you have paid of your loan - the Student Loans Company will normally write to you if this is likely to happen.
Pension Contributions
Pension contributions are calculated as the percentage you entered of your base employment salary (i.e., not including overtime). This is deducted from your take-home pay, but as you do not pay tax on pension contributions it is also deducted from your taxable income, reducing the tax that you pay. Pension options do not affect calculations of self-employment income.
Corporation Tax
| Corporation Tax Rates | |
|---|---|
| Small profits rate | 19 % |
| Small profits limit | £ 50,000 |
| Main rate | 25 % |
| Marginal relief lower limit | £ 50,000 |
| Marginal relief upper limit | £ 250,000 |
| Standard fraction | 3/200 |
Corporation tax is due on the profit of limited companies. If the company's profit is below the small profits limit of £50,000, the profit is taxed at a rate of 19 %. If the profit is above the small profits limit, all the profit is taxed at the main rate of 25 %
However, if the profit is between £ 50,000 and £ 250,000, the tax is reduced by the difference between the profit and £ 250,000, multiplied by the standard fraction of 3/200. This means that the effective corporation tax rate increases gradually from the small profits rate to the main rate between the lower and upper limits.
Tax on Dividends
| Dividend Tax Rates | |
|---|---|
| (taxed after other income) | |
| £ 0 - £ 37,700 | 8.75 % |
| £ 37,700 - £ 125,140 | 33.75 % |
| Over £ 125,140 | 39.35 % |
If you have a limited company, any money left over after expenses, your salary, Employer's NI and Corporation Tax will be available for you to take as a dividend.
Dividends are taxed according to the normal income tax thresholds, but at different rates (the rates are different because Corporation Tax has already been taken off this income). Dividends are taxed after other income - so your tax-free personal allowance would be applied to your salary first, and any remainder used for dividends. Similarly, if you have other taxable income it will "use up" the lower rates of tax before the dividends can use the remainder. You do get £1,000 of dividends tax free, and then on the first £37,700, you pay 8.75% tax. Between £37,700 and £125,140 you pay 33.75% tax, and above £125,140 you pay 39.35% tax.