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Firstly, for those that don't know the Income Tax personal allowance is a tax-free amount decided by the government that everyone in the U.K is allowed to earn and it generally increases a little bit each year.

For 2018-2019 its £11,850 and for 2019-2020 its £12,500.

So, if you are self-employed and tax is deducted on all your income including the tax-free amount, how come when you complete your tax return you don't get that £2000 back automatically?

The quick answer to this is Class 4 National insurance.

Class 4 national insurance is charged at 9% of your net profits over about £8500 up to £46000 and the 2% on earnings over that, the more you earn, the more class 4 you need to pay.

Class 4 national insurance is not deducted from your pay like your tax is instead its deducted from your rebate (tax overpaid), so the tax your owed for the benefit of your personal allowance is simply put towards paying what you owe for national insurance.

Assuming for 18.19 you earn £35K and tax is deducted on all your income, your personal allowance will give you the benefit of £2370 tax overpaid, however your class 4 national insurance bill will be £2391, this example doesn't include any expenses and is simply to make the point about national insurance.


Self-employed National Insurance contributions 2018-2019 2019-2020
Small profits threshold – Earnings below this threshold incur no NICs £6,205 £6,365
Class 2 NICs – for those earning above the Small profits threshold £2.95 per week £3.00 per week
Lower Profits Limit – Earnings up to this limit incur only Class 2 NICs. Over this limit incurs Class 4 NICs £8,424 £8,632
Upper Profits Limit – Earnings up to this limit incur:
  • Class 2 NICs
  • Class 4 NICs at 9% of the profit between the Lower Profits Limit and Upper Profits Limit
£46,350 £50,000
Earnings above the Upper Profits Limit – Any earnings above this limit incur:
  • Class 2 NICs
  • Class 4 NICs at 9% of the profit between the Lower Profits Limit and Upper Profits Limit
  • Class 4 NICs at 2% of the profit above the Upper Profits Limit
Over £46,350 Over £50,000

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