If you are self-employed you will pay your tax using a self-assessment tax return. This article will give you an overview of the self-assessment process and your legal obligations as a self-employed individual.
How do I tell HMRC that I need to fill in a tax return?
It is your responsibility to inform HMRC that you have started to trade and to file a tax return under self-assessment.
As a business owner you’re responsible for:
keeping records of your business’s sales and expenses
sending a self-assessment tax return every year
paying Income Tax on your profits and Class 2 and Class 4 National Insurance
You do not need an accountant to file your tax returns, you can file them yourself.
However, it is important that you understand the legal requirements, not only in terms of the figures that are included, but in terms of the deadlines that penalties. You’ll get a penalty if you need to send a tax return and you miss the deadline for submitting it or paying your bill.
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What income and expenditure is included?
All taxable income will need to be reported on your tax return.
ISA interest and other non-taxable income such premium bond winnings or casual gambling profits do not need to be reported. There are special rules when it comes to taxing your taxable personal income.
Remember you are entitled to your personal allowance which is £12,500 from April 2019 (this is restricted once your income reaches £100,000).
Non-savings income is taxed first. This includes:
Bank interest is taxed second. The rates of tax that you apply are:
20% (for the first £37,500 of taxable income),
40% for the next £112,500 and
45% for any income in excess of £150,000.
Dividends are taxed last.
The first £2,000 of dividends are taxed at 0% and then 7.5%, 32.5% and 38.1%, where they are taxed at the basic, higher or additional rates.
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31 October if you are filing the paper version following the tax year ending.
The last tax year started on 6 April 2017 and ended on 5 April 2018. The current tax year started on 6 April 2018 and will end on 5 April 2019.
If you need to submit a self-assessment return for the first time, you need to inform HMRC by 5 October following the tax year in which you started trading.
What are payments on account?
Payments on account are advance payments towards your tax bill. They are made in two instalments.
Income Tax is payable on 31 January following the tax year. Where most of your income is not taxed throughout the year as it is earned e.g. a self-employed individual, it is likely that you will fall under the payments on account regime.
Let’s say it is 2018/19 and you make payments on account each year. For example, if you paid £1,000 in the tax year for which you are filing your return:
You will make a payment on account on 31 January 2018, which will be equal to half of the previous year’s tax liability (£500)
You will make a further payment on account on 31 July 2018, once again equal to half of the previous year’s tax liability (£500)
This will include Class 4 National Insurance Contributions where applicable, but not student loan repayments or Capital Gains Tax.
Once the actual tax liability is calculated for 2018/19, you will deduct the payments you have already made and pay or reclaim the difference from HMRC.
Most small businesses will work with an accountant here to ensure they are making the correct payments on account.