Self-Employed Tax Guide: How PAYE Differs from Self-Assessment

Self-Employment vs Employment: Key Differences

If you're self-employed, your tax obligations differ significantly from someone on PAYE:

	Employed (PAYE)	Self-Employed
Tax collection	Deducted automatically by employer	You calculate and pay via Self Assessment
NI class	Class 1 (8%/2%)	Class 2 (£3.45/week) + Class 4 (6%/2%)
Expenses	Limited	Wide range of allowable deductions
Payment	Monthly via payroll	Twice yearly (31 Jan + 31 Jul) or monthly (Budget Payment Plan)
Tax year end	Handled by employer	Self Assessment deadline: 31 January

Income Tax for Self-Employed

Income tax rates are exactly the same as for employees. You get the same personal allowance (£12,570) and pay the same rates (20%, 40%, 45%). The difference is that you calculate tax on your profit (income minus allowable expenses), not your gross income.

National Insurance: Class 2 & Class 4

Self-employed people pay different NI classes:

Class 2 NI

Rate: £3.45 per week (£179.40/year)
Only if profits exceed £6,725/year
Counts towards your state pension entitlement

Class 4 NI

Profit Band	Rate
Up to £12,570	0%
£12,571 – £50,270	6%
Over £50,270	2%

Note: Class 4 rates are lower than Class 1 employee rates (6% vs 8%). Self-employed people pay less NI overall but don't get employer contributions.

Allowable Expenses

You can deduct legitimate business expenses from your income before calculating tax. Common allowable expenses include:

Office costs: Stationery, phone bills, software subscriptions
Travel: Business mileage (45p/mile for first 10,000 miles), public transport, parking
Working from home: Proportion of rent/mortgage interest, utilities, broadband (or flat rate £6/week)
Professional services: Accountant fees, legal advice, insurance
Marketing: Website, advertising, business cards
Equipment: Tools, computers, furniture (capital allowances may apply)
Training: Courses directly related to your current business

Trading Allowance

If your self-employed income is under £1,000/year, you don't need to register as self-employed or report it — this is the trading allowance. Useful for small side hustles.

Payment on Account

If your tax bill exceeds £1,000, HMRC requires Payments on Account — advance payments towards next year's tax bill:

31 January: First payment (50% of previous year's bill) + any remaining balance from previous year
31 July: Second payment (50% of previous year's bill)

This means in your first year of self-employment, you might face a large January bill covering the full year's tax plus 50% advance payment.

Self Assessment Deadlines

5 October: Register as self-employed (after your first tax year of trading)
31 October: Paper return deadline
31 January: Online return deadline + first payment on account
31 July: Second payment on account

Should You Use an Accountant?

If your income is straightforward and under the VAT threshold (£90,000), you can probably manage with accounting software like FreeAgent, Xero, or QuickBooks. For more complex situations — multiple income streams, approaching higher tax bands, or employing staff — an accountant can often save you more than they cost.

Our salary calculator is designed for PAYE employees. If you're self-employed, consider using HMRC's own Self Assessment tools or consulting an accountant for accurate calculations.