Small earnings from self employment – tax and nic implications

Whether you’ve recently started freelancing, taken on a side hustle, or earned a modest amount from self-employment, understanding your tax obligations is crucial. Many people assume that small earnings from self-employment don’t require any tax action, but HMRC takes a different view. In this post, we’ll walk through the key tax and National Insurance implications of self-employment income in the 2024/25 tax year, so you know exactly where you stand.

Do you need to register as self-employed?

The first question is whether you’re legally required to register with HMRC as self-employed. The rule is straightforward: if you’re carrying on a trade or business with a view to making a profit, you should register within three months of starting. This applies regardless of how much you earn.

However, there’s a practical consideration. If your annual turnover is below £1,000, you don’t need to keep records or file a tax return—provided you declare the income on your Self Assessment tax return (if you have one for other reasons). This is known as the “trading allowance” relief, and it’s a useful provision for people with very modest self-employment income.

That said, registering early is often sensible. It establishes a clear audit trail and helps protect you if HMRC later questions your activities. Registration is free and takes just a few minutes online through HMRC’s services.

The trading allowance and the £1,000 threshold

Let’s talk about one of the most helpful reliefs for small earners: the trading allowance. For the 2024/25 tax year, if your self-employment income is £1,000 or less, you can claim the full amount as a deduction against your profit. In practical terms, this means no income tax is due on earnings up to this threshold.

This is genuinely valuable. You don’t need to keep detailed records of expenses if you’re below the threshold—HMRC simply allows you the £1,000 as a blanket relief. If you earn more than £1,000, you can still use the trading allowance, but only up to the £1,000 limit.

One important caveat: if you have other sources of income (employment, rental income, etc.), you’ll still need to file a Self Assessment return to declare everything. The trading allowance is a relief from income tax, but it doesn’t exempt you from the requirement to file if you’re otherwise due to do so.

National Insurance contributions on small earnings

This is where many self-employed people are caught out. Even if you’re not paying income tax, you may still need to pay Class 2 and Class 4 National Insurance.

Class 2 NI is a flat-rate contribution of £163.80 per year (2024/25), payable if your profits are above £6,725. For many people with small self-employment earnings, this will apply. Class 2 contributions build up your eligibility for the State Pension and certain benefits.

Class 4 NI is paid on profits between £11,908 and £50,270 at a rate of 8%. If your self-employment profit falls below £11,908, you don’t pay Class 4 NI.

So, hypothetically, if you earn £8,000 from self-employment, you’d pay Class 2 NI (£163.80) but no income tax (thanks to the trading allowance) and no Class 4 NI (because you’re below the £11,908 threshold). It’s not a huge bill, but it’s important to budget for it.

Record-keeping and filing requirements

Even if you’re earning a small amount and won’t owe much tax, good record-keeping is essential. HMRC can request records up to five years after the end of the tax year, and failure to produce them can result in penalties. Keep receipts for expenses, invoices you’ve issued, and a note of income received.

If your turnover exceeds £85,000, you’ll need to register for VAT—though this is unlikely to apply if you’re earning modest amounts from self-employment.

Self Assessment returns are due by 31 January following the end of the tax year. If you’ve had any self-employment income during the year, you must file (unless you’ve registered with the trading allowance and have no other tax obligations). Filing online is straightforward and far preferable to paper returns.

Final thoughts

Small self-employment earnings might feel too insignificant to worry about, but HMRC expects you to declare them and pay the appropriate tax and NI. The good news is that the trading allowance and higher NI thresholds mean the tax bill is often modest—or even zero. The key is understanding your obligations and staying compliant from the outset.

For tailored advice, contact Severn Accounting — we’re here to help.