How Much Can You Earn Tax-Free While Self-Employed?

October 24, 2019

Taxation is a complicated process. There are many rules and regulations that apply, each with their selection of caveats, loopholes and ambiguities. Trying to understand all facets of tax is a job appropriate only for a financial expert. But that doesn’t mean you can’t learn a thing or two about how things work. 

When it comes to tax, what matters to most self-employed workers is exactly how much you have to pay. In this blog, we take a look at tax-free income self-employed individuals can earn, and how the whole system of tax-free income actually works. 

How Much Can You Earn Tax-Free While Self-Employed? Your Personal Allowance

Every working individual in the United Kingdom has a base rate of income that is non-taxable. This means up to a certain threshold, no income tax is taken from your earnings. The figures are the same, whether you are traditionally employed or self-employed. As of 2019, personal allowance is £12,500. So, you will not be charged income tax on any earnings up to this point. 

It is worth noting this figure changes every year, usually rising with inflation. So when you ask yourself “how much can I earn tax-free while self-employed?” the answer will be different in 2019, as it will in 2020. 

There is also a caveat to this number. If you earn over £100,000 per year, you will start to see your personal allowance reduced. For every £2 over the figure you earn, your personal allowance will decrease by £1. So for example, if you earn £100,002 a year, your personal allowance will be £12,499. If you earn £125,000 or above, your personal allowance will be £0 and all your earnings will be subject to income tax. 

Other Ways to Save Money and Earn Tax-Free Income

There are a few ways you can change the way you earn that result in additional tax-free income for yourself and your business. These include:

Expenses — 

Expenses allow you to reduce your tax bill by claiming back money paid out of your own pocket for the success of your business. For example, if you needed to buy computers for your company, you can add these expenses to your tax returns. How this works, in reality, is, if you paid for £500 worth of equipment, you could add this payment to your non-taxable allowance, raising it from £12,500 to £13,000. However, for an item to be a claimable expense, it must be both relevant and necessary. A ladder is an acceptable purchase that a window cleaner can claim for — but not an IT consultant. 

Partner Income

Everybody is entitled to non-taxable income. However, some people do not use any of this income at all. If you are in a relationship with an individual who does not bring home a salary or has a salary less than their personal allowance, you can use your self-employed status to save on tax. All you have to do is have them become a partner in your business. If they are registered to your company, you will need to establish a partnership or a public limited company. Then your partner can become an employee and earn a salary. By including your partner’s personal allowance alongside your own, you can dramatically shift how much tax you can save. 

Don’t Forget National Insurance Tax

While personal income tax allowance is often cited as the threshold for taxation and the figure at which you start to see tax come out of your pay, you must also keep in mind National Insurance (NI) tax too. 

NI is a lesser expense than income tax, but it is still important to be aware of.

Self-employed workers will pay Class 2 and Class 4 National Insurance if their income meets a certain level. 

  • Class 2 payments are £3 per week and taken if you earn £6,365 or more a year. 
  • Class 4 is 9% of income above the threshold figure, of £8,632. 

These figures are unique to self-employed workers and don’t apply to the traditionally employed. Given these numbers, the true answer to the question “how much can I earn tax-free while self-employed” is £6,364 — although more significant fees are taken after you break your personal allowance threshold. 

Note that you cannot use expenses to save on National Insurance tax. Expenses only impact your personal allowance, not the threshold for NI. 

Need help figuring out what tax you do and don’t have to pay? Looking for the best ways to secure more tax-free earnings? Our online accountants can help! 

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