What you need to know about self-employed tax
When you register as self-employed, you become liable to pay income tax on your earnings, but nobody really sends you a guide to everything you need to know or even tells you what to expect next.
The first thing is not to panic – registering as a sole trader is the first step, and you should do that as soon as possible after you start earning money independently.
Remember that you will eventually have to pay tax, so set aside a portion of everything you earn ready to pay your bill once it’s calculated.
But beyond that, to a large extent you can focus on your business and just wait for HM Revenue & Customs to get in touch when your first tax bill is due.
Filing accounts for the first time
Self-assessment claims to be simple, but if you’re not comfortable with business finances, you might want to find an accountant who works with sole traders and is willing to prepare your accounts for you.
This can be a huge help in terms of your tax admin, as you can designate your accountant as your ‘agent’ to deal directly with HMRC on your behalf.
You then just have to supply the accountant with your figures – including your earnings, overheads and expenses – and they will calculate the taxable profit, deduct your personal tax-free allowance from it, and tell you how much you have to pay overall.
As a self-employed individual, when you pay your taxes you must also normally make some National Insurance contributions. You may have seen these itemised on pay slips in the past, if you previously had a job as an employee of a company.
Finally, make sure you tell your accountant if you have an outstanding student loan, or include it in the appropriate place on your tax return if you file your own accounts, as you may have to make a repayment towards this too.
How to pay your tax
It is essential that you recognise that the deadline to pay your tax in full is the same as the deadline for filing your accounts – so if you leave them until the last minute, you leave yourself very little time to pay what you owe, when you find out your final figures.
You can file your accounts any time after the start of the tax year in April, and they should cover any trading in the previous financial year – but the final deadline isn’t until January 31st of the following calendar year.
With ten months to file your accounts, it’s a good idea to get it done early, especially in your first year when you might not know how much tax you can expect to pay.
When you get your tax bill, there are plenty of different ways to pay it, but one of the easiest is by direct online transfer to the appropriate HMRC account number and sort code – this is very fast and if you’re close to the final deadline, it gives you a good chance of avoiding any penalties.
You don’t have to pay it all in one go, so again, if you get your tax bill early in the year, you can pay chunks off when you have a good month, and just leave yourself a final balance for January.
Paying tax on account
If your total tax bill is over a certain threshold, you will be asked to pay the following year ‘on account’. This means that instead of paying everything in January, you also pay a second sum by the end of July of each year.
The amount you pay in July is an estimate based on half of your total tax bill from the previous year, and the idea is that this forces you to spread out your payments slightly.
If you spread your payments out anyway, you just need to make sure that your total by the end of July has reached the amount you owe ‘on account’, and that you transfer enough to pay the second half of your bill by the end of January as normal.
But if your work is seasonal – and you normally work hard in the run-up to Christmas to get the money together for your January tax bill – then it’s worth being aware that at some point, you will have to start paying in July as well.
Payments on account still add up to the same amount overall – it’s not an increase in the tax you pay – and if you file your year’s accounts between April and July, your next instalment can be recalculated to be a more accurate reflection, rather than an estimate.