How to Transition from Employment to Self-Employment: Tax Considerations
- MAZ
- 1 day ago
- 20 min read
Index:
Mastering Your First Year of Self-Employment—Tax Returns, Deadlines & Smart Planning
From Payslips to Profits—Handling PAYE, Refunds, and Mid-Year Transitions
Sole Trader or Limited Company? Business Structure, VAT & Tax Efficiency Explained
Long-Term Tax Success—Avoiding Pitfalls, Maximising Refunds & Staying Compliant
Summary Points: Tax Essentials for Transitioning to Self-Employment
FAQs
The Audio Summary of the Key Points of the Article:
Listen to our podcast for a comprehensive discussion on:
How to Transition from Employment to Self-Employment: Tax Considerations
The Tax Shift—What Happens When You Leave PAYE and Go Solo?
Going Self-Employed? Here’s What Changes Tax-Wise, Straight Up
If you're wondering how to transition from employment to self-employment in the UK, the biggest tax difference is how and when you pay your taxes. Under employment, your tax and National Insurance are automatically deducted through the PAYE system. But when you're self-employed, you're now the one responsible for calculating, reporting, and paying your tax via HMRC’s Self Assessment system.
So, let’s break this down clearly, from real-time tax thresholds to what to expect in your first year out of PAYE.
Understanding the Income Tax You Owe in 2024–25
When you're self-employed, you still pay income tax, but instead of having it deducted from your payslip, you report your income after the end of each tax year.
Here’s what HMRC says you’ll pay in Income Tax bands for 2024–2025 (valid until 5 April 2025):
Band | Taxable Income (£) | Rate |
Personal Allowance | 0 – 12,570 | 0% |
Basic Rate | 12,571 – 50,270 | 20% |
Higher Rate | 50,271 – 125,140 | 40% |
Additional Rate | 125,141+ | 45% |
What If You Earn Over £100,000?
For every £2 you earn over £100,000, your Personal Allowance decreases by £1. Once you hit £125,140, you lose your allowance entirely.
National Insurance Contributions (NICs): What Self-Employed People Pay
Unlike employees, who pay Class 1 NICs, self-employed workers usually pay Class 2 and Class 4 NICs.
Here’s what you need to know for the 2024–25 tax year:
Class 2 NICs
Flat rate of £3.45/week (unless your profits are under the Small Profits Threshold of £6,725).
Paid as part of your Self Assessment.
Class 4 NICs
Paid on profits, not income.
9% on profits between £12,570 and £50,270.
2% on profits over £50,270.
These are not taken monthly—they’re bundled into your 31 January and 31 July Self Assessment payments.
Your First Year Out of PAYE: What to Expect
Let’s use a real example.
🧾 Case Study: Montague, a former tech project manager
Montague earned £65,000 annually in his full-time role, taxed under PAYE. He left employment in May 2024 and started freelance consulting in June. By March 2025, his profit from self-employment was £40,000.
Here’s what changed for Montague:
Element | While Employed | After Going Self-Employed |
Tax paid automatically? | Yes (via PAYE) | No – via Self Assessment |
Tax calculation handled? | By employer | By Montague (or his accountant) |
Tax paid? | Monthly via payroll | Lump sum on 31 Jan + 31 Jul |
NICs paid? | Class 1 | Class 2 & Class 4 |
Receives payslip? | Yes | No – must keep business records |
🔔 Pro Tip: Montague didn’t have to pay any tax until January 2026—a full nine months after the 2024–25 tax year ends.
Sounds great? Sure, but this delayed payment often results in under-preparation, and HMRC hits you with two big bills back-to-back. More on how to manage that later.
Emergency Tax and PAYE Overpayments—Will You Get a Refund?
One of the most-Googled questions when switching is:
“Do I get a tax refund when I leave employment?”
Yes, you often do—especially if you leave mid-tax-year and your employer used emergency tax codes or you didn’t fully use your Personal Allowance.
Example:
Let’s say Harriet, a London-based nurse, earned £38,000/year. She left her job in September 2024 and didn’t work the rest of the tax year. HMRC will have taxed her as if she earned £38,000 across the full tax year, not just April–September. That likely means overpaid tax, which she can reclaim.
💡 Solution: Use your P45 and claim through HMRC or let it be corrected automatically through your Self Assessment (if registering as self-employed by October 5).
Registering for Self-Employment: When and How
You must register with HMRC by 5 October in your second tax year of self-employment, or you risk a fine.
So if you go self-employed in July 2024, the deadline to register is 5 October 2025, covering the tax year ending April 2025.
Step-by-step guide:
Go to HMRC Self Assessment Registration.
Provide details (NI number, contact, business type).
Wait for your Unique Taxpayer Reference (UTR) via post.
Set up Government Gateway to manage your taxes online.
What About PAYE? Will I Still Be in the System?
Yes, if you’ve worked under PAYE, HMRC holds your records.
🔍 Tip: You can use your Personal Tax Account to:
View your PAYE history
Check if you’re owed a refund
Update employment status
Transition from Employment to Self-Employment: Tax Considerations in the UK (2020–2025)
Mastering Your First Year of Self-Employment—Tax Returns, Deadlines & Smart Planning
What Is Self Assessment and Why Does It Matter?
So you've ditched the payslip life. No more monthly tax deductions? Nice! But here’s the twist—HMRC still wants its slice, and it's up to you to calculate and send it.
The Self Assessment system is how the UK government collects tax from individuals who don’t pay it automatically (i.e., via PAYE). That includes sole traders, freelancers, landlords, and directors.
You’ll now submit a Self Assessment tax return once a year to declare:
Income from self-employment
PAYE income (if applicable)
Interest or dividends
Pensions or property income
Tax reliefs and expenses
First-Year Self Assessment Timeline: Month-by-Month Breakdown
If you went self-employed in 2024, you’ll be reporting income for the tax year 6 April 2024 to 5 April 2025, known as the 2024–25 tax year.
Here’s how your first-year tax calendar should look:
Month | What to Do |
April 2024 | Start of new tax year – track income/expenses |
By Oct 5, 2025 | Register for Self Assessment (if not already) |
By Jan 31, 2026 | Submit online return for 2024–25 + pay bill |
By July 31, 2026 | Pay second instalment (if required by HMRC) |
This means, if you become self-employed in May 2024, you don’t need to pay your first tax bill until January 2026—but don’t get comfy! That lump sum can catch you off guard if you don’t plan properly.
Payments on Account—The Hidden Sting of Year One
This is the most misunderstood part of going self-employed in the UK.
If your tax bill is over £1,000, HMRC assumes you’ll earn the same the following year and asks for advance payments, known as Payments on Account.
You pay:
50% of your bill on 31 Jan
50% again on 31 July
Let’s illustrate that with a real case.
🧾 Case Study: Bernardine, freelance illustrator
Earned £30,000 profit in her first year (2024–25)
Tax and NICs due = £4,000
HMRC asks for:
£4,000 by 31 Jan 2026 (for 2024–25)
PLUS 50% of that (£2,000) as advance for 2025–26
Total due in January: £6,000
Another £2,000 due in July 2026
💥 Surprise! That’s a £6K bill all at once in January.
Pro tip: Open a separate business savings account. Save 25–30% of each client payment to cover taxes.
Allowable Expenses—Claim What You Can!
In your first year, tracking allowable expenses can seriously reduce your tax bill.
Here’s what counts as a legitimate deduction:
Expense Type | Examples |
Office costs | Stationery, printer ink, postage |
Travel expenses | Fuel, parking, train tickets for business travel |
Staff costs | Freelancers, virtual assistants |
Clothing | Uniforms or branded gear (not everyday clothes!) |
Marketing | Ads, website domain, branding |
Home office | Flat rate or proportion of bills (see below) |
Claiming for Working from Home?
Use HMRC’s simplified method if you work from home at least 25 hours/month:
Hours Worked/Month | Flat Rate You Can Claim |
25–50 | £10/month |
51–100 | £18/month |
101+ | £26/month |
🔗 GOV.UK: Simplified Expenses for the Self-Employed
Keeping Records—Because HMRC Can Ask for Proof
You must keep financial records for 5 years after the submission deadline.
Records can be digital or paper-based and must include:
Sales and income invoices
Expense receipts
Mileage logs
Bank statements
Tax calculation notes
A good cloud-based tool like FreeAgent, QuickBooks, or Xero can save you hours at year-end and help dodge fines.
When to Use an Accountant—and When You Don’t Need One
You don’t need an accountant to file a Self Assessment. But if:
You’re earning over £50K
Have multiple income sources
Claim complex expenses
Or just hate maths...
Then yes, hire one!
Expect to pay £250–£600 for an annual return, depending on complexity.
✅ Tip: The accountant’s fee is an allowable business expense too.
How to Actually File a Return (Online)
When January rolls around, here’s how to file:
Log in via HMRC’s Self Assessment Portal
Fill in income, expenses, and any other relevant sections
HMRC calculates your bill immediately
Pay via debit card, bank transfer, or Direct Debit
You can also save and return to complete later. Don’t rush it—errors can result in penalties up to £1,600 or more if not corrected on time.
Avoiding Penalties: Don’t Let Deadlines Bite
Late filing = £100 fine, even if you owe no tax.
Add 3, 6, and 12 months of delays, and you could owe:
Delay Period | Fine |
1 day late | £100 fixed fine |
3 months late | £10/day (up to 90 days) = £900 |
6 months late | Extra 5% of tax owed or £300 (whichever’s more) |
12 months late | Another 5% or £300 (again, whichever’s more) |
💡 Tip: You can appeal penalties if you have a reasonable excuse (e.g., death in the family, illness, HMRC service failures).
Your first year of self-employment is less about making money and more about managing money smartly—so you don’t get hit with surprise tax bills, stress, or penalties. Planning early, tracking everything, and understanding Self Assessment are key to building a sustainable freelance or sole trader career.
UK Employment to Self-Employment: Tax Consideration (2020-2025)
From Payslips to Profits—Handling PAYE, Refunds, and Mid-Year Transitions
Leaving Employment Mid-Tax-Year? Here’s What Happens Tax-Wise
First things first—you don’t need to finish a tax year to go self-employed. You can switch at any point. But doing it mid-year comes with quirks like:
Overpaying tax through PAYE before you leave
Triggering emergency tax codes
Owing less than HMRC expected, which might mean a refund
Let’s unpack this.
Understanding How PAYE and Self-Employment Mix in the Same Tax Year
In the tax year you go solo, HMRC expects you to declare both your:
PAYE income (from your job), and
Self-employment income (from your new business)
This gets reported on your Self Assessment tax return.
Example:
Let’s say Dougal, a Manchester-based civil engineer, earned £35,000 between April and September 2024 under PAYE. Then he launched a consulting business and earned £22,000 profit from October to April 2025.
His Self Assessment return for 2024–25 would include:
PAYE income: £35,000 (already taxed via payroll)
Self-employment income: £22,000 (to be taxed by HMRC)
Total income = £57,000. Now HMRC recalculates his total tax owed for the full year. If Dougal overpaid during PAYE, he’ll get a refund. If not enough tax was paid, he’ll owe the rest by 31 Jan 2026.
Emergency Tax Codes—Why They Happen and How to Fix Them
Ever noticed your final payslip had less than expected take-home pay? You might’ve been hit with an emergency tax code.
This usually happens if:
You start or leave a job mid-year
Your employer doesn’t have your full income info
You start self-employment but still earn PAYE wages from a temp job
You’ll see codes like “1257 W1” or “BR” on your payslip. That means HMRC applied a temporary tax rate, often taxing your entire wage as if you’ll earn it all year—ouch.
🔧 How to Fix It:
Ask your employer to use your P45 (if you have one).
Contact HMRC to update your tax code.
Submit a Self Assessment return, and HMRC will recalculate everything for the year.
Emergency Tax Codes — How to Fix Them
Claiming Back Overpaid PAYE Tax When You Go Self-Employed
If you leave your job early in the tax year and don’t hit your full £12,570 Personal Allowance, HMRC might owe you money.
Real Case: Georgina, part-time administrator
Georgina earned £10,000 in PAYE income before quitting in July 2024 to become a virtual assistant. She didn’t earn more income until late in 2025.
Because she didn’t exceed her personal allowance, HMRC withheld too much tax—and she’s due a refund.
Here’s how she claimed:
Got her P45 from her last employer.
Logged into HMRC’s tax refund portal.
Entered employment dates and income.
Refund issued in 2–4 weeks.
✅ Top Tip: Even if you don’t submit a tax return, you can still request a PAYE refund using HMRC’s online checker.
How Your PAYE Tax Already Paid Affects Your First Tax Return
Let’s get technical—but stay friendly. 🧠
When you submit your first Self Assessment:
You include gross PAYE income and tax already paid
HMRC combines it with your self-employed income
Then recalculates your total tax owed across both
If you’ve:
Overpaid via PAYE → You get a refund
Underpaid (common with multiple incomes) → You owe the rest
🧮 Example Calculation:
Frederick left his job in July 2024 and went self-employed.
Income Type | Amount |
PAYE income | £20,000 |
Tax already paid (PAYE) | £2,400 |
Self-employment profits | £25,000 |
Total taxable income | £45,000 |
Tax due:
Personal allowance: £12,570
Taxable income: £32,430
20% tax = £6,486
Minus £2,400 already paid = £4,086 still due
HMRC sends this figure after you submit your return—due by 31 January 2026.
P45, P60, and Self-Employment—What You Need to Keep
If you worked in a job during the tax year, HMRC wants proof when you do your return.
Here’s what to keep:
Form | What it shows | When you get it |
P45 | Income and tax from your last employer | When you leave your job |
P60 | Total income/tax paid for full tax year | Each April (if still employed) |
P11D | Benefits in kind (e.g. company car) | July (if applicable) |
📂 Store these somewhere safe. You’ll enter figures from them directly into your return—or give them to your accountant.
Switching to Self-Employed Mid-Year—How to Register Smoothly
It doesn’t matter when in the year you switch—just make sure you register with HMRC by 5 October in the second tax year of being self-employed.
So if you left employment and started your gig in June 2024, register by 5 October 2025.
Here’s how:
Visit GOV.UK’s registration portal
Provide your NI number, personal details, and business info
Receive your UTR (Unique Taxpayer Reference) in about 10 days
Set up your Government Gateway login for filing returns
What If You Go Back to Employment Mid-Year? Hybrid Status Explained
Yep, you can be both self-employed and employed in the same year. It’s more common than you think—especially for freelancers taking part-time contracts or gig economy work.
Here’s how that works:
You still file a Self Assessment
Declare both types of income
HMRC figures out how much tax you’ve under/overpaid in total
🔎 HMRC doesn’t tax you twice—they reconcile both types of income into a single bill or refund. Just make sure you track both clearly and keep your records tidy.
Transitioning from PAYE to self-employment mid-tax-year isn't messy if you know the rules. Understanding your old tax setup (like emergency tax, overpayments, and PAYE history) gives you an edge when filing your first return and avoiding cash flow shocks.
Sole Trader vs. Limited Company in the UK: Key Tax and Population Trends (2020–2025)
Sole Trader or Limited Company? Business Structure, VAT & Tax Efficiency Explained
What’s the Best Legal Setup for You—And When Should You Change It?
If you’re newly self-employed, you’re likely starting out as a sole trader. It’s quick to set up, and tax is straightforward. But as your income grows, a limited company might offer better tax efficiency and legal protection.
Let’s compare the two side by side.
Feature | Sole Trader | Limited Company |
Taxation | Personal Income Tax & NICs | Corporation Tax + Income Tax on salary/dividends |
Set-up | Simple via HMRC | Register with Companies House |
Liability | You’re personally liable | Company is a separate legal entity |
Privacy | Personal details kept private | Director details are public |
Tax efficient at? | Typically under £35,000–£40,000 profit | Above £40,000–£50,000+ profit |
Sole Trader Vs. Limited Company
🔍 Quick test: If your profits exceed £50,000, it may be time to run the numbers on going limited.
What Is the Trading Allowance—and Should You Use It?
The trading allowance is a £1,000 tax-free threshold for small-scale or casual self-employment income. If your gross income is under £1,000 for the year, you don’t need to:
Register for Self Assessment
Pay tax
Submit a tax return
But there’s a catch…
If you claim the trading allowance, you can’t deduct expenses. So if your expenses are more than £1,000, you’re better off not claiming it and using normal expense deductions instead.
🧾 Example: Eustace, part-time dog walker
Earns £900/year walking dogs
No other self-employment ✅ He qualifies to skip Self Assessment entirely!
But if he earned £2,000 and had £1,200 in expenses, it’s better to not claim the trading allowance and deduct actual costs instead.
Should You Register for VAT—and What’s the Threshold?
You must register for VAT (Value Added Tax) if your taxable turnover exceeds £90,000 (2024–25 threshold) in any rolling 12-month period.
VAT Topic | Info |
Threshold | £90,000 turnover (not profit!) |
Rate | Standard 20% (some goods/services may be 5% or 0%) |
Voluntary registration? | Allowed—and often strategic if dealing with VAT-registered clients |
Returns frequency | Usually quarterly via Making Tax Digital (MTD) compatible software |
Benefits of registering early:
Claim back VAT on expenses (e.g. equipment, software)
Look more professional to B2B clients
Downsides:
Adds 20% to your prices (unless absorbed)
More admin work and record-keeping
⚠️ Important: You don’t pay VAT on income until you're registered. Even if you’re just £100 below the threshold, you’re still exempt.
What’s Corporation Tax and When Will It Apply to You?
If you operate through a limited company, your business pays Corporation Tax (rather than Income Tax).
For 2024–25:
Companies with profits up to £50,000 pay 19%
Companies with profits over £250,000 pay 25%
Between those limits, it’s a marginal rate between 19% and 25%
🧾 Example: Thomasina’s design studio
Earns £80,000 revenue, £50,000 profit
As a sole trader, she'd pay ~£9,000 tax and NICs
As a limited company, she'd pay:
19% Corporation Tax = £9,500
Then pay herself via salary + dividends (which are taxed differently)
💡 If you reinvest profits or don’t need to draw the full income, a company structure can save thousands.
How Do You Pay Yourself as a Director?
In a limited company, you’re an employee and shareholder. You typically pay yourself via:
Small salary (usually £12,570 to use up Personal Allowance)
Dividends on remaining profits
Dividend tax rates 2024–25:
Dividend Income Band | Tax Rate |
Up to £1,000 (allowance) | 0% |
Basic rate (up to £50,270) | 8.75% |
Higher rate (up to £125,140) | 33.75% |
Additional rate (125,141+) | 39.35% |
🧠 Strategy tip: Combining a small salary + dividends often leads to less tax/NIC overall than being taxed as a sole trader.
Do You Need to Be Making Tax Digital (MTD) Compliant Yet?
MTD is HMRC’s digital tax initiative, and for now:
VAT-registered businesses must follow MTD rules
Self-employed individuals earning over £50,000 will need to comply from April 2026
So unless you’re VAT registered, you don’t need MTD software yet, but choosing MTD-ready tools like FreeAgent, QuickBooks, or Xero is future-proofing.
Switching from Sole Trader to Limited Company—How to Do It
If you start as a sole trader and later want to go limited, it’s totally doable.
Here’s the checklist:
Register company via Companies House
Notify HMRC you’ve ceased as sole trader
Open a new business bank account
Set up payroll for salary
Appoint yourself as Director and Shareholder
Migrate assets, if applicable (e.g. website, equipment)
How to Switch from Sole Trader to Limited Company
⚠️ Be careful about Capital Gains Tax if transferring large business assets from sole trader to company. You might need a tax specialist advice.
Business structure isn’t one-size-fits-all. You can start simple (sole trader), scale wisely (consider VAT), and switch when the tax savings justify it (limited company). What matters is staying agile and compliant while keeping your cash flow strong.
Long-Term Tax Success—Avoiding Pitfalls, Maximising Refunds & Staying Compliant
Now That You’re Self-Employed—What Can Go Wrong?
Here’s a sobering truth: Many new sole traders and small business owners end up paying more tax than they should, just because they:
Forget deadlines
Miss out on allowable deductions
Under-save for future tax bills
Misreport income
Ignore VAT when scaling
Let’s break down how to avoid these issues—and build habits that keep HMRC happy and your business tax-efficient.
Mistake #1: Forgetting to Budget for Your Tax Bill
As we covered in Part 2, you don’t pay tax monthly as a self-employed person—you pay it in big chunks, often with advance payments on account.
To avoid cash flow panic:
Save 25–30% of every payment you receive
Keep a separate tax savings account
Use cloud accounting tools to track profit in real time
🧠 Remember: Profit is what you’re taxed on, not revenue. Just because you received £5,000 doesn’t mean it’s all yours.
Mistake #2: Missing HMRC Deadlines and Getting Fined
Here’s a simple list of the key tax deadlines every UK self-employed person must remember:
Date | What’s Due |
5 October | Register for Self Assessment (second tax year) |
31 January | Online tax return deadline + 1st tax payment |
31 July | Second payment on account (if required) |
Monthly/Quarterly | VAT returns if registered |
🧨 Late filing and payment = automatic penalties starting at £100, escalating fast. We showed the full breakdown above.
✅ Set up calendar reminders. Or better yet, use FreeAgent or Xero—they remind you automatically.
Mistake #3: Under-Claiming Expenses and Leaving Money on the Table
If you’re not tracking every expense, you’re donating money to HMRC unnecessarily.
Here’s a reminder of common missed deductions:
Phone and broadband (business proportion)
Training courses and webinars (related to your work)
Co-working space fees
Client lunches (50% of cost if directly related)
Business travel (trains, mileage at 45p/mile)
Home office costs
🧾 Example: Rosamund, a freelance copywriter, claimed only £500 in expenses her first year. When she switched accountants, they helped her identify £2,800 in allowable costs—reducing her tax bill by over £600.
Mistake #4: Not Understanding Overpayments or Refunds
If you:
Had PAYE income and didn’t use your full Personal Allowance
Overpaid Class 2 or Class 4 NICs due to incorrect profit estimates
Paid Payments on Account for a year where your income dropped
…you might be entitled to a refund.
🛠 How to get your money back:
Submit your Self Assessment with accurate figures
HMRC will automatically recalculate your tax position
Any overpaid amount is refunded—usually within 4–6 weeks
If they hold it as credit, you can request a direct bank repayment
HMRC Red Flags—What Triggers a Tax Review?
HMRC won’t audit every return, but certain patterns can flag your file:
Trigger | What It Means |
Claiming large losses repeatedly | Suggests under-reporting income or inflating costs |
Drastic income drops without reason | Could trigger review of figures |
Inconsistent figures year-to-year | e.g. £80k one year, £15k the next |
Not registering for VAT when due | If your turnover exceeded £90,000 but you didn’t register, they’ll notice |
Missing NI contributions | Class 2/4 NICs not being paid signals a red flag |
🧠 HMRC uses AI tools to detect anomalies. Just be honest and keep records for at least 5 years after submission.
Self-Employed for Life? Here’s How to Keep Your Tax Game Strong
Once you’re up and running, make tax efficiency part of your long-term routine:
🔁 Review your business structure annually
Are you still better off as a sole trader? If profits are rising above £50k–£60k, it might be time to go limited.
🧾 Keep receipts and records like a pro
Use mobile scanning apps. Digitise everything. HMRC accepts digital evidence.
📆 Automate your tax calendar
Use software that links to your bank account and alerts you to deadlines. No more guesswork.
💼 Get an accountant when things get complex
Yes, it’s an expense—but a tax-deductible one. Good accountants often save more than they cost.
💻 Migrate early to digital tax software
By April 2026, Making Tax Digital (MTD) will be mandatory for most self-employed taxpayers earning over £50,000.
Your Tax Checklist—Quarter-by-Quarter Routine
Quarter | What to Do |
Q1 (Apr–Jun) | Track new tax year from day 1. Review last year’s return. |
Q2 (Jul–Sep) | Submit second payment on account (if needed). Evaluate expenses. |
Q3 (Oct–Dec) | Prep for filing. Tidy up records. Chase clients for any late pays. |
Q4 (Jan–Mar) | File & pay return by 31 Jan. Review need for accountant or software upgrades. |
Graph of Your Tax Checklist—Quarter-by-Quarter Routine
Final Word: You’ve Got This—And You’re Not Alone
Going self-employed in the UK is a bold move—but if you’ve made it this far, you’ve already handled more tax knowledge than most!
Just remember:
Stay aware of deadlines
Track every pound in and out
Don’t be afraid to ask for help
HMRC is not your enemy—but they expect you to get it right
💡 This wraps up our 5-part, 5,000-word masterclass on:
“How to Transition from Employment to Self-Employment: Tax Considerations in the UK”
Each section builds on the last to deliver maximum value, live 2025 insights, and real-world solutions for UK taxpayers looking to thrive outside traditional employment.
Summary of All the Most Important Points Mentioned In the Above Article
When you go self-employed, you must handle your own tax via Self Assessment instead of having it deducted through PAYE.
The 2024–25 personal allowance is £12,570, and income above that is taxed in bands of 20%, 40%, and 45%.
Self-employed individuals must pay both Class 2 and Class 4 National Insurance Contributions based on their annual profits.
You must register with HMRC for Self Assessment by 5 October following your first self-employed tax year.
Payments on account can double your first tax bill if it exceeds £1,000, so setting aside 25–30% of your income is essential.
Leaving PAYE mid-tax-year may result in overpaid tax, which you can reclaim using your P45 and HMRC’s refund tool.
Sole traders earning under £1,000 may benefit from the trading allowance, but it can’t be used alongside expense claims.
VAT registration becomes mandatory if your turnover exceeds £90,000 in any rolling 12-month period.
Switching to a limited company can be more tax-efficient once profits exceed around £50,000, due to lower tax on dividends.
Avoid penalties and HMRC scrutiny by tracking all income and expenses, meeting filing deadlines, and maintaining clean records for five years.
Recap of the Tax Considerations for Transition from Employment to Self-Employment
FAQs
Q1. Can you go self-employed while still working in a PAYE job?
Yes, you can be both employed and self-employed simultaneously in the UK, but you must report both income streams in your Self Assessment tax return.
Q2. Do you need to notify your employer if you start working as self-employed?
Legally, you do not have to inform your employer unless your employment contract explicitly restricts outside work or there’s a conflict of interest.
Q3. Can you claim Universal Credit if you’re newly self-employed?
Yes, you can claim Universal Credit while self-employed, but your earnings are assessed monthly, and the Minimum Income Floor may apply.
Q4. How do you prove your income when self-employed for things like mortgages or loans?
You typically need to show your SA302 forms or HMRC tax calculation summaries for the last 1–3 tax years as proof of income.
Q5. Can you register as self-employed and then switch back to employment without penalties?
Yes, you can return to employment at any time, but you must inform HMRC if you stop self-employment to avoid unnecessary tax filings.
Q6. What insurance do you need when going self-employed in the UK?
While not always legally required, you may need public liability, professional indemnity, or business insurance depending on your sector.
Q7. Do you need a business bank account when you go self-employed?
No, it’s not legally required for sole traders, but keeping business and personal finances separate is highly recommended for easier accounting.
Q8. Are you eligible for maternity pay or leave if you go self-employed?
Self-employed individuals aren’t eligible for Statutory Maternity Pay but can claim Maternity Allowance from the government if eligible.
Q9. How do you track mileage for tax purposes when self-employed?
You can use HMRC’s approved mileage rates (45p per mile for the first 10,000 miles) and must keep accurate records of business travel.
Q10. What happens to your workplace pension if you go self-employed?
You can no longer contribute through auto-enrolment but can continue paying into a personal pension or set up a self-employed pension plan.
Q11. Can you hire staff if you’re self-employed?
Yes, self-employed individuals can employ others, but they must register as an employer with HMRC and operate PAYE for their staff.
Q12. What are the tax implications of hiring your spouse or family members?
You can employ family members if the salary is reasonable for the work done, and it must be reported via PAYE and included in business expenses.
Q13. Can you claim childcare costs as a self-employed tax expense?
No, childcare costs are not allowable business expenses, but you may qualify for Tax-Free Childcare through HMRC’s separate support scheme.
Q14. What happens if you miss the Self Assessment registration deadline?
If you miss the 5 October registration deadline, HMRC may issue penalties, and you must still submit a return and pay tax on time.
Q15. Do you need to register for Self Assessment if you earn under £1,000 from self-employment?
No, if your total self-employed income is under £1,000 for the year, you can use the trading allowance and avoid registering.
Q16. Can you carry forward self-employed losses to future tax years?
Yes, you can carry forward trading losses to offset against future profits, reducing your tax bill in later years.
Q17. Is there a penalty for not keeping business records when self-employed?
Yes, HMRC can fine you up to £3,000 if you fail to keep accurate and complete records for at least 5 years after the filing deadline.
Q18. How do you close your self-employed status with HMRC if you stop trading?
You must notify HMRC via your Self Assessment return or contact them directly to deregister and avoid ongoing tax obligations.
Q19. Can you backdate self-employment registration if you started earlier in the year?
Yes, but late registration may result in penalties; always provide accurate start dates when completing the HMRC registration form.
Q20. Do you need to pay tax in advance every year as a self-employed person?
Only if your tax bill exceeds £1,000; in that case, HMRC requires payments on account in January and July each year toward your next bill.
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