If you’re new to self-employment, getting your head around paying tax can feel daunting at first. But it doesn’t need to be panic-inducing – you just need to arm yourself with the right information.
In this article, we look at everything you need to know about paying tax as a self-employed professional. Let’s get started.
How are taxes collected from the self-employed?
When you're employed by someone else, your tax is automatically collected from your salary. So you don’t need to worry about working out how much you owe, or paying a tax bill.
But when you’re self-employed, managing how much tax you owe – and making sure you pay it on time – is down to you. All self-employed professionals need to pay their tax through HMRC’s Self Assessment system. This usually gets called ‘filing a Self Assessment’ or ‘ filing a tax return’. It’s normally done online (although you can also do it by post).
The process involves providing HMRC with information about your business finances – so, how much you’ve earned, and how much you’ve spent on business expenses. You’ll also need to provide information about any other income you’ve had outside of your self-employed work (like if you also work a part-time job, for example, or make money from renting out a house you own).
Everyone who’s self-employed and earns more than £1,000 of self-employed income needs to file a Self Assessment.
Here’s a step-by-step guide to doing so:
Register as self-employed
This has to be done by no later than 5th October in the second tax year you’ve worked as a sole trader.
So, if you started working as a freelancer in February 2020, you’d need to be registered as self-employed by 5th October 2020 at the latest.
Ideally, though, you’d register as self-employed as soon as possible (there’s nothing to be gained from leaving it to the last minute).
After you’ve registered, you’ll get a Unique Taxpayer Reference (UTR) number in the post. Make sure to make a note of this as you’ll need it when it comes to filing your Self Assessment.
Monitor and keep accurate records of all your income
From the minute you become self-employed, it’s crucial to keep a close eye on all of your earnings. It can be useful to open a business bank account to do this, but you don’t need to. Using an app like Finmo can help you to track your income easily from your phone.
‘Income’ means both the money you make from your self-employed work, and all other earnings, including profits from asset gains, earnings from any work where you’re employed by someone else, and rental income if you own properties.
Monitor and keep accurate records of all your business expenses
You don’t have to pay tax on anything you buy for your business. So when you do your Self Assessment, you’ll tell HMRC exactly how much you’ve spent on business expenses and take this figure off your total income for the year – the result being that you pay less tax overall. To avoid overpaying on your tax bill, you’ll need to keep accurate records of your business expenses throughout the year.
One way to do this is to keep hold of receipts and use a spreadsheet to record everything. But as with recording your income, there are also apps out there that can help to streamline this process and keep things more accurate.
This hub on self-employed expenses is useful for finding out more about exactly what you can and can’t claim as a business expense.
- Keep tabs on any outgoings you can get ‘tax relief’ on
‘Tax relief’ just means other things you don’t have to pay tax on outside of your actual business expenses. For example, the Government has schemes in place that mean you don’t need to pay tax on some charitable donations, as well as most types of pension payments. When you file your Self Assessment, you’ll need to provide details of these too.
Just like with business expenses, the sum of your tax relief expenses will get taken off your total income, lowering your tax bill overall.
How to file your Self Assessment
You can file your Self Assessment in any one of the following ways:
- File it through the HMRC portal, without any assistance from an accountant
- Hire an accountant, who’ll sort your Self Assessment for you and submit it on your behalf
- Use tax software to track your finances through an app – some platforms will also offer accountancy help and submit your Self Assessment on your behalf
Important Self Assessment deadlines
You need to pay your tax bill by the 31st of January in your business's second year, but you can pay it sooner than this if you want.
Try not to leave sorting your Self Assessment until the last minute, as it can be more time consuming that you expect, and there are penalties for filing late.
You’ll then pay all following Self Assessments by the 31st of January every year.
Payments on account
You’ll also need to make payments on account twice a year – on the 31st of January and 31st of July. Think of these like advance payments for your tax bill for the following year. The payments are worked out by looking at your tax for the year before. In January, you’ll pay half what you owed the previous year, and in July you’ll pay the other half.
What happens if you don’t have the funds to pay your tax bill?
If you don’t have enough money saved for your tax bill by the deadline, it’s important to tell HMRC as soon as possible. Try to do so well before the tax deadline, or you could be hit with penalties and interest.
What happens if you do miss the deadline?
If you miss the Self Assessment deadline you'll get a £100 fine straight away. You’ll then get three months to pay up. If you still haven’t paid by this point you'll get a £10 daily fine for the next 90 days, increasing the fine to a potential £1,000. That’s why it’s so important to submit your tax return and pay your bill on time, even if you have to amend it later:
You can make changes to your Self Assessment after you've filed it
If you make a mistake on your Self Assessment, you can make changes to it in the HMRC portal. You can do this anytime up to 31st of January the next year.
It can be easy to put off thinking about taxes when you’re self-employed, but with some basic knowledge you’ll soon see there’s nothing to worry about. Once you’ve got to grips with some of the lingo and how it all works, you’ll be able to focus your attention on what really matters – making your business thrive.