How to Become Self-Employed in the UK and Understand Your Tax Obligations

James
Jul 22
4 min read

Self-employment offers a way to formalise your earnings, gain flexibility, and avoid tax authority issues. As of 2022, approximately 13% of UK workers were self-employed, enjoying independence but facing unique responsibilities. This guide explains how to become self-employed, the types of self-employment, visa eligibility, and the taxes you’ll need to pay.

What Is Self-Employment?

Self-employment means working for yourself, not an employer, and includes freelancing, running a small business, or working on contracts. It’s also a way to formalise passive income (e.g., dividends or rental income) or earnings from outside the UK. To comply with UK law, you must register with HM Revenue & Customs (HMRC) and file an annual Self-Assessment tax return.

Types of Self-Employment in the UK

Sole Trader: The simplest and most common form, where you run your business as an individual, keeping all profits after tax but bearing personal liability for debts. This article focuses on sole traders.
Partnership: Two or more individuals share profits and liabilities.
Limited Company: A separate legal entity offering liability protection but with stricter regulations, such as filing accounts with Companies House.

You can be employed (e.g., working for a company) and self-employed simultaneously, formalising part-time work or additional services. Research all options to choose the best structure for your needs.

Can Non-UK Residents Become Self-Employed?

Anyone with permission to live and work in the UK can become self-employed, including holders of visas like:

Innovator Founder Visa
Start-up Visa
Global Talent Visa

Exceptions: Tourist visas, Short-Term Student visas, and Parent of a Child Student visas do not permit self-employment.

Skilled Worker Visa: This visa ties you to a sponsoring employer, but you can undertake self-employed work for up to 20 hours per week in the same occupation as your main job.

Always check your visa conditions to ensure compliance.

How to Become Self-Employed in the UK

Register with HMRC: Notify HMRC of your self-employed status within three months of starting your business (by 5 October for the tax year starting 6 April). Register for Self-Assessment and, if applicable, Class 2 National Insurance contributions (NICs) via gov.uk or by post using form CWF1. HMRC will issue a Unique Taxpayer Reference (UTR) for tax filings.
Keep Records: Maintain accurate records of income and expenses to support your tax return.
Set Up a Business Bank Account: While not mandatory, separating personal and business finances simplifies accounting.

Failure to register on time may result in penalties.

Taxes for Self-Employed Individuals

As a self-employed sole trader, you’ll pay Income Tax and National Insurance Contributions (NICs) based on your profits (income minus allowable expenses). The UK tax year runs from 6 April to 5 April, with tax returns and payments due by 31 January of the following year.

1. Filing a Self-Assessment Tax Return

Requirement: Submit an annual Self-Assessment tax return online at gov.uk, detailing your income and expenses.
Deadline: For the 2024/25 tax year (6 April 2024 to 5 April 2025), file by 31 January 2026. Late filing incurs a £100 penalty, with further penalties if delayed beyond three months.
Tip: Keep records of all transactions, including receipts, invoices, and bank statements.

2. Paying Income Tax

The UK uses a progressive tax system. For the 2025/26 tax year, the rates are:

England, Wales, and Northern Ireland:

£0–£12,570: 0% (Personal Allowance)
£12,571–£50,270: 20% (Basic Rate)
£50,271–£125,140: 40% (Higher Rate)
Over £125,140: 45% (Additional Rate)

Scotland:

£0–£12,570: 0% (Personal Allowance)
£12,571–£14,876: 19% (Starter Rate)
£14,877–£26,561: 20% (Basic Rate)
£26,562–£43,662: 21% (Intermediate Rate)
£43,663–£75,000: 42% (Higher Rate)
£75,001–£125,140: 45% (Advanced Rate)
Over £125,140: 48% (Top Rate)

Note: If your income exceeds £100,000, the Personal Allowance reduces by £1 for every £2 above £100,000, disappearing entirely at £125,140.

3. Paying National Insurance Contributions (NICs)

Self-employed individuals pay:

Class 2 NICs: £3.45 per week (2025/26 rate) if profits exceed £6,725 annually. These are flat-rate contributions for state pension eligibility.
Class 4 NICs:
- 6% on profits between £12,570 and £50,270.
- 2% on profits above £50,270.

Example: If your annual profit is £30,000 in England:

Income Tax: (£30,000 - £12,570) × 20% = £3,486
Class 2 NICs: £3.45 × 52 weeks = £179.40
Class 4 NICs: (£30,000 - £12,570) × 6% = £1,045.80
Total: £3,486 + £179.40 + £1,045.80 = £4,711.20

4. Additional Considerations

Payments on Account: If your tax bill exceeds £1,000 and less than 80% of your income is taxed at source, HMRC may require advance payments (due 31 January and 31 July).
Allowable Expenses: Deduct business expenses (e.g., office costs, travel, equipment) to reduce taxable profits.
VAT: Register for VAT if your taxable turnover exceeds £90,000 (2025/26 threshold), charging 20% VAT on services but reclaiming VAT on business purchases.

Need Help?

Navigating self-employment taxes can be daunting. Foundry Accounting’s qualified accountants can assist with registration, vat return service, record-keeping, tax return preparation, and compliance. Contact us at foundryaccounting.co.uk for tailored support to ensure your business thrives while meeting HMRC requirements.