Income tax for the self-employed
Paying tax: self-employed
By Ian Robinson
Article 1 of 6
Paying tax: self-employed
Find out when your tax payments will be due if you're self-employed, including any payments on account.
In the video below, we explain how to fill out a tax return 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 2016-17 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?.
Self-employment tax period
Your profits are worked out for an accounting period – usually 12 months.
You can choose when your accounting year ends – and change your year-end date if you want to.
- Choosing a date early in the tax 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.
- If your accounting year ends on 5 April, in 2017-18 you are taxed on profits for the year to 5 April 2017.
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 the helpline for the newly self-employed – 0845 915 4515.
Self-employment tax payments
In your first year, you are taxed on profits from the date you started to the end of the tax year. This may not be a full 12 months.
In the second year, you are normally taxed on profits for 12 months to the accounting date in that tax year.
After that, your accounting year will normally cover a period of 12 months, and your tax bill will be based on the profits you made during the accounting year that ended during the tax year.
- Each tax year runs from 6 April to 5 April- so the 2016-2017 tax year covers profits made in your accounting year that ended between 6 April 2016 and 5 April 2017.
- The profits you made in this period must be declared in your 2016-17 tax return. Deadlines for submission are 31 October 2017 for a paper return and 31 January 2018 for an online return.
- Tax due must be paid by 31 January 2018. If you sent in your return by 31 October, HMRC will work out your tax for you.
- 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).
- 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.
Payments on account
After your first full year of business, as well as paying tax for the tax year that’s ended, you are also required to pay tax for the current year in two instalments, called 'payments on account.'
- The first payment on account is due on 31 January. It is normally half the tax (and Class 4 National Insurance contributions) you’ve paid for the previous 12 months.
- A second payment on account is due on 31 July. This is normally for the same amount.
- If you make more than you did in the previous year, a third instalment (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).
The intention is to spread tax payments across the year. If you think your profits will be less than last year, you can get the payments on account that you have to make reduced. 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.
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 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.
- Last updated: November 2017
- Updated by: Tom Wilson