Tax for the self-employed When the self-employed pay tax
You can claim some tax reliefs when self-employed
Taxable profits
There are various expenses and allowances which you need to take into account when working out your taxable profits.
Broadly, taxable profits are your yearly takings less allowable business expenses, annual investment allowance, capital allowances and losses (see below).
Each item you deduct in working out your profits reduces the tax you pay. For details, see HMRC helpsheet HS222.
When you are taxed
Your profits are worked out for an accounting period, usually 12 months.
You choose when your accounting year ends and you can change your year-end if you want to. Normally you are taxed on profits for the accounting year ending in the tax year.
For example, if your accounting year ends on 30 April, in 2010-11 you are taxed on profits for the year to 30 April 2010.
Payments on account
After your first year of business, you usually pay instalments of tax through two payments on account.
You then make a final top-up tax payment (or claim a refund) on 31 January following the end of the tax year.
If you choose an accounting year-end early in the tax year, there is a long gap between earning your profits and reporting them and paying the final tax bill.
You should make sure that you save enough money to pay your tax bill and your payments on account during the year or you may have to pay interest and financial penalties as well if you miss the payments.
If you choose an accounting year-end of any day between 31 March and 5 April ,or 31 March, you are simply taxed on the profits you make in the tax year. This is called fiscal accounting.
It means there is only a short delay between your year-end and sorting out the tax, but it has the advantage that it is simple to operate, and you normally pay tax in the January of the relevant tax year and the July following the end of it. Any final payment to clear any remaining tax must be made by the following 31 January.
See When payments on account are due for more.
Losses
If you make a loss rather than a profit in any tax year you can offset the loss by carrying it forward to deduct from any future profits you make from the same business.
Alternatively you can use the loss immediately to reduce your income tax bill (and sometimes any capital gains tax bill) for either this or the previous tax year. Further options apply in the opening and closing years of your business venture. See HMRC helpsheet HS227 for more details.
New business?
Different rules apply about which profits are taxed when you open a new business. See HMRC helpsheet HS222.
You must register with HMRC within three months of the end of the month in which you start your business. Call the helpline for the newly self-employed – 0845 915 4515.
For more information if you're self-employed, see our book Working for Yourself.
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