Posted: Thu 3rd Jun 2021
Self-employment is a dream for many people in the UK. Being your own boss has its benefits, including choosing how you work, where you work and who you work with.
However, if you're self-employed, you'll need to submit an annual Self Assessment tax return to HM Revenue & Customs (HMRC). Whether you're a freelancer or the owner of a limited company, discover how to pay Self Assessment tax in the UK for your business.
What is Self Assessment tax, and why do I need to pay it?
If you're registered as self-employed, you'll be responsible for paying your taxes. Self Assessment is the system HMRC uses to collect your National Insurance Contributions (NICs) and income tax for the previous financial year.
National Insurance + income tax = Self Assessment tax
In the UK, the financial year starts on 6 April and ends on 5 April.
As salaries and paydays for employed people are typically fixed, National Insurance and income tax are easily deducted. Even better, most companies will have a payroll department to handle all the paperwork.
That's not the case with self-employment, where earnings and pay dates are unpredictable.
Rather than filing a tax return every time you get paid for a job, Self Assessment lets you pay your taxes at the end of your tax year.
What is the Self Assessment tax period?
The Self Assessment tax period is another way of saying 'tax year'. As mentioned previously, the tax year for most employed people ends on 5 April.
However, if you're self-employed, you can choose if your tax year ends on 5 April or 31 March. Regardless of which date you choose, you'll need to pay your Self Assessment tax by 31 January the following year.
Consequently, if your tax year ends on 31 March, you'll have roughly 300 days to pay your Self Assessment tax for that year. If your tax year ends on 5 April, you'll have slightly less time to pay.
If you're newly self-employed, Self Assessment can get tricky due to 'payments on account'.
What are payments on account?
Payments on account are additional Self Assessment payments that self-employed people need to make on top of their bill for the previous tax year. Confused? Don't be.
Imagine that your first tax year of self-employment ended on 31 March. Let's also assume that your tax bill for that first year is £4,000, due by 31 January of the following year.
With HMRC's payments on account system, you'll also owe them 50% of your current tax bill, i.e. £2,000. In other words, you'll need to pay £6,000 on or by 31 January. You need to pay the remaining £2,000 by 31 July of the same year.
Payments on account are designed to spread tax payments across the year, removing the burden of paying all the tax you owe in one go. However, it can be initially confusing and costly if you've only budgeted for the first year's tax bill, i.e. £4,000.
If payments on account mean you can't afford to pay your tax bill, there are other payment options. You'll need to contact HMRC and agree on an alternative way of paying, either through monthly or quarterly payments.
Not everyone who is self-employed has to follow the payments on account system. If your tax bill is £1,000 or less, you can just make a single tax payment. The same applies if more than 80% of your tax bill was paid via Pay As You Earn (PAYE).
What information will I need to fill in a Self Assessment tax return?
If you've never filled in a Self Assessment tax return before, it can seem complex. However, once you understand the process, it's relatively simple, as long as you have the relevant information to hand. This includes the following:
Your 10-digit unique taxpayer reference (UTR) number. HMRC assigns each self-assessment taxpayer a unique 10-digit UTR to track their tax records. Like your National Insurance number, your UTR stays with you all your life
Details of your untaxed income from the tax year, including income from self-employment, dividends and interest on shares
Records of any expenses relating to your self-employment
Any contributions to charity or pensions which might be eligible for tax relief
A P60 or other documents showing how much income you've received and already paid tax on
How can I keep accurate records?
Keeping accurate records is essential if you want to pay the correct amount of tax. Accurate tax payments also help you measure how your business performs over time.
An accurate Self Assessment will help highlight important business metrics, including your profits, losses and future projections.
You'll need to submit proof of all your income and expenses during the task year. Consequently, you should keep and file all receipts for goods and stock, bank statements, invoices, chequebook stubs, sales invoices, till rolls and bank slips.
Downloading an accounting app like QuickBooks will help simplify the Self Assessment process. With a tool like this, you can upload receipts, statements and more, putting your documents in one place and making submission easier at the end of the tax year.
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