Self-Assessment tax season is once again upon us and the new tax year brings updated tax rates for self-employed individuals in the UK, specifically for sole traders. One of the key changes for 2021-22 is the National Insurance Contributions. It is important to familiarise yourself with these changes and set aside enough money for your Self Assessment tax return so you don't run into any trouble. Let's take a look at some of the key updates for you to be mindful of before filing your Self-Assessment tax form in 2023.
First things first, if you are register as self-employed and have earned more than £1000, you have to file a Self-Assessment tax form in 2023. If it's your first time, don't worry, it's not as scary as it seems. We recommend that you fill out your self-assessment form on the HMRC government website. Note, the deadline to complete your self-assessment form is midnight on the 31st January 2023.
Personal Allowance for Freelancers
Let's start with a positive - your Personal Allowance. Personal Allowance represents the amount you can earn without having to pay tax. The Personal Allowance for self-employed people in 2022/23 is £12,570, which is the same as the previous tax year. This means that only income above this threshold will be taxed.
However, the Personal Allowance decreases by £1 for every £2 earned over £100,000, and is completely eliminated for those earning over £125,140.
Trading Allowance for Freelancers
Another self-employed tax allowance is the trading income allowance, which is £1,000 per tax year that can be used against any income made from self-employment. The good news is that it can be used in addition to the Personal Allowance.
If self-employed income is less than £1,000, there is no need to register as self-employed or file a tax return. However, if it is more than £1,000, a return must be filed and the trading allowance can be used to deduct £1,000 from income. Keep in mind that if expenses exceed £1,000, it may be more beneficial to claim them instead of the trading allowance. If you'd like more information on Trading Allowance for freelancers, we wrote a jargon-free breakdown here.
Self-Employed Income Tax Rates 2022/2023
The self-employed income tax rates for 2022/23 for sole traders in England, Wales, and Northern Ireland remain the same as the previous year, with all income earned above the Personal Allowance being taxed at 20% for the basic rate (£12,571- £50,270), 40% for the higher rate (£50,271 – £150,000), and 45% for the additional rate (over £150,000).
Note: Scotland has different tax rates and bands.
National Insurance Rates 2022/2023
Additionally, National Insurance rates for 2022/23 will also apply for sole traders. The amount of taxes you need to pay is based on your profits, which is calculated by subtracting your allowable expenses from your income.
It is important to be aware of the two types of National Insurance contributions that apply to sole traders: Class 2 and Class 4. Recent changes have been made to National Insurance contributions for the 2022/23 tax year, which were announced during the Spring Statement and the mini-budget. The most current rates can be found below.
Class 2:
| Profits (per year) | Rate |
| Below £11,908 | £0 – no Class 2 payable |
| £11,908+ | £3.15/week |
Class 4:
| Profits (per year) | Rates |
| Below £11,908 | £0 – no Class 4 payable |
| £11,908 – £50,270 | 9.73% |
| Over £50,270 | 2.73% |
Do You Need To Register For VAT?
When your company's annual revenue surpasses £85,000 within a one-year period, it is mandatory to register for Value Added Tax (VAT), which is a tax applied to most goods and services. Once registered, you must begin charging VAT on your sales, but you can also recover VAT on purchases.
You can still choose to register for VAT even if you earn less than £85,000. When considering whether to register for VAT, it is important to weigh the pros and cons. If your business is under the VAT threshold, you must decide whether to increase your prices to charge VAT to customers or to pay the VAT yourself, which would reduce your profits. If your customers are primarily businesses and VAT-registered, it may be easier to charge them VAT as they can claim it back. However, if your customers are not businesses (ie: members of the general public) and not VAT-registered, the increase in prices may negatively affect sales.
Managing VAT can be complex as there are various rates and VAT schemes to consider. Proper record-keeping of all transactions and the rate of VAT charged is crucial.
Well, that about does it for self-assessment tax in 2023. Hopefully you've found this information useful and the idea of filing your self-assessment tax return is less daunting. We have a bunch of great articles on freelance tax, finances and money management here if you'd like to learn more.
Disclaimer: Please note that this blog article is for informational purposes only and should not be considered as professional tax advice. The information provided may not be up-to-date and may not apply to your specific situation. It is always recommended that you consult with a qualified tax professional before making any decisions regarding your taxes. The author of this article and the publisher of this website cannot be held responsible for any actions taken based on the information provided in this article.
