Income tax for the self-employed
Paying tax: self-employed
By Ian Robinson
Article 1 of 6
Paying tax: self-employed
If you're self-employed, find out how self-employment tax returns work, when you have to pay tax - and find out everything you need to know about making payments on account.
In the video below, we explain how to fill out a tax return as a self-employed person.
How do I pay tax as a self-employed person?
If you are self-employed, you’ll need to make a self-assessment tax return each year.
As you fill in your return, there are various expenses and allowances you should take into account to work out the income you’ll be taxed on (your taxable profits).
Broadly, taxable profits are your yearly takings, minus allowable business expenses, annual investment allowance, capital allowances and losses.
You can get a head start on your 2017-18 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.
This guide explains everything you need to know about the self-employment tax period, important payment dates to remember, and how payments on account work. You can jump to the section you want using the links below.
- What is the self-employment tax period?
- How do self-employment tax payments work?
- What is payment on account?
- Why do you have to pay in advance?
- What are self-employed losses?
- How to pay your self-assessment tax bill
Your profits are worked out for an 'accounting period', which is usually 12 months.
The good news is that you can choose when your accounting year ends – and change your year-end date if you want to.
Choosing the right accounting period
Choosing a date early in the tax year (which runs from 6 April-5 April the following year) gives you more time to get your accounts made up, and the flexibility to time pension contributions to manage your tax bill.
Conversely, if your accounting year ends 31 March, for example, you have only a few days to check your accounts before the tax year ends.
So, how does this work. If you had selected an accounting year ending on 5 April, in the tax year 2018-19 you'll be taxed on profits for the year 6 April 2017 to 5 April 2018.
Watch out - you may face penalties if you do not declare profits from your business or fail to register for National Insurance or (if it applies to you) VAT within set time limits.
The safest course is to register your business as soon as possible. Call HMRC's helpline for the newly self-employed – 0845 915 4515.
Self-employed tax payments: need to know
How the tax year works
Each tax year runs from 6 April to 5 April - so the 2017-2018 tax year covers profits made in your accounting year that ended between 6 April 2017 and 5 April 2018.
What profits you pay tax on
The profits you made in this period must be declared in your 2017-18 tax return. Deadlines for submission are 31 October 2018 for a paper return and 31 January 2019 for an online return.
When tax payments are due
Tax due must be paid by 31 January 2019. If you sent in your return by 31 October, HMRC will work out your tax for you.
When you file a tax return?
If you send in your return later, you must file it online, and the HMRC software will tell you how much tax is due (although it doesn't always take account of your most recent payment on account).
When you don't have to pay a tax bill
If you owe no more than £3,000 tax, are paid a salary or pension, and get your return in by 30 December, the tax can be collected in instalments during the coming year through PAYE.
After your first full year of business, as well as paying tax for the tax year that’s just ended, you are also required to pay tax for the current year in two instalments. These are known as 'payments on account.'
In this Q&A, we tell you everything you need to know about making 'payments on account'.
Payments on account are designed to spread tax payments across an entire year.
It means that you don’t have tax money sloshing around in your accounts for 12 months, and that you’re able cover most, if not all of your tax bill before you are due to pay it.
The first payment on account is due on 31 January. The second instalment is due on 31 July.
The calculation is fairly simple. HMRC splits the amount of tax you paid in the previous tax year in two, and makes you pay it over two periods in the tax year.
That amount includes income tax due on your profits, and any National Insurance contributions you paid.
For example, if you paid £10,000 tax in the last tax year, you will make two payments of £5,000 for the forthcoming tax year - £5,000 on 31 January and £5,000 on 31 July.
If you make more than you did in the previous year, a third instalment, known as a ‘balancing charge’ of tax is due on 31 January.
If you make less than you did in the previous year, you get a refund (and your new payments on account go down).
For example, say the amount of tax you paid last year was £10,000, resulting in payments on account of £5,000 per instalment.
This year, you’ve incurred tax of £12,000.
On 31 January, you’ll have to pay £2,000 in additional tax. And your payments on account will increase to £6,000 (£12,000 divided by 2), meaning you’ll have to pay:
- £8,000 on 31 January
- £6,000 on 31 July
Not everyone who is self-employed has to make payments on account. If you owe £1,000 or less, you can make a single payment by the next 31 January.
The same applies if more than 80% of your tax bill was paid via PAYE.
If you think your profits will be less than last year, you can get the payments on account that you have to make reduced.
To do this, you have to contact HMRC. You have one of two options:
- You can either fill out form SA303 and send it to your local tax office;
- Or login into your online Personal Tax Account and visit ‘Reduce payments on account’.
You won’t need to provide any evidence that your tax bill will be lower. But beware artificially reducing your payments on account so they are super-low - if a high figure still turns out to be due, you will be charged interest on the difference.
Conversely, if payments on account cause you to overpay tax, you’ll receive interest on the surplus.
If you’re struggling to pay your tax bill on either 31 January or to meet your second payment on account on 31 July, there is help at hand.
Contact HMRC and make a ‘payment proposal’ – an alternative way of paying your bill, either through monthly or quarterly payments.
HMRC will consider this proposal, and may ask for more information about other assets you have, such as savings and investments, before accepting the offer.
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.
The time you need to allow to make your payment to HMRC depends on how you're choosing to pay.
Make sure the payment deadlines are in your diary - 31 January for any tax you owe for the previous tax year (AKA a balancing payment) and your first payment on account; 31 July for your second payment on account.
HMRC has outlined how long various forms of payment can take.
Same day or next day:
- Online or telephone banking
- Debit card online
- At your bank or building society
Three working days:
- Direct debit (if you've already set one up with HMRC)
- Cheque through the post
Five working days:
- Direct debit (if you haven't set one up with HMRC before)
If the payment deadline falls on a weekend or bank holiday, the payment needs to reach HMRC on the final working day beforehand. Late payments may result in a penalty.
You can no longer pay HMRC via credit card or at the Post Office.
- Last updated: January 2018
- Updated by: Danielle Richardson