Do you need to submit a tax return when you're self-employed?
If you're self-employed, you’ll need to file a self-assessment tax return each year.
You'll need to detail all income you've received during the tax year in question. This can be offset against any expenses and allowances you qualify for, meaning that your resulting tax bill will only be based on your taxable profits.
You'll often need to pay the tax you owe in two chunks twice a year - a method known as 'payments on account'.
This guide explains how payments on account work, as well as how to decide on your accounting period, and many other aspects of self-assessment tax that you'll need to consider when you're self-employed.
- Get a head start on your 2021-22 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?.
Video: how to file your self-employed tax return
In our short video below, we explain how to make sure you pay the right amount of tax on your self-employed income.
What is the self-employment tax period?
While HMRC issues deadlines to submit your return and pay the tax you owe, you can choose the dates that your tax is calculated for. This is your 'accounting period', which usually spans 12 months.
Many sole traders choose between 31 March to 5 April for their year end, as the tax year finishes on 5 April and HMRC says that accounts prepared to 31 March will count as being prepared to the end of the tax year.
This means your accounts will start again in accordance with the start of a new tax year, and you'll have the longest possible time in which to pay the tax you owe, which won't be due until 31 January the following calendar year.
However, choosing this time of year won't work for everyone - if it's your busiest period of work, for instance, it's worth changing your accounting year to end to a time when business is quieter and you have the time to finalise your year end accounts.
Your 'basis period' is the period HMRC assesses your tax on. It's nearly always the same as your accounting period - especially if your accounting year end is the same as the tax year end.
Basis period reform from 2024-25
From April 2024 all unincorporated businesses must use 6 April to 5 April as their basis period, regardless of their accounting period.
The 2023-24 tax year will be a transitional year where businesses may need to calculate a basis period that's longer than 12 months if their accounting period doesn't match up to the tax year.
After the reform, many businesses may find it easier to move their accounting period to 6 April to 5 April.
How do self-employment tax payments work?
- Year 1: in your first year, you're taxed on profits made from the date you started your business to the end of the tax year. For instance, if you started your business on 5 February, you'd be taxed on the profits you made between 5 February and 5 April.
- Year 2: in the second year, you're taxed on profits for 12 months to your 'accounting date'. In our example, this would again be 5 February - so you'll be charged on profits made between 5 February to 4 February, effectively paying tax for a second time on profits between 5 February and 5 April. This is referred to as 'overlap profits' and can be claimed back - but only when you cease trading.
- Year 3: your tax bill will be based on profits made to your accounting year.
Self-employed tax payments: need-to-knows
What is the 'tax year'?
6 April-5 April
Each tax year runs from 6 April to 5 April - so the 2021-22 tax year covers any profits you've made during your accounting year, which will have ended between 6 April 2021 and 5 April 2022.
What profits do you pay tax on?
When are tax payments due?
Any tax due for the 2021-22 tax year must be paid by 31 January 2023. Late payments will incur interest, and HMRC may add other late penalties.
What if you're filing late?
If you send in your return later, you must file it online, and the HMRC software will tell you how much tax is due. Note that this calculation doesn't always include your most recent payment on account.
Are there other ways to pay?
If you owe no more than £3,000 in 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.
What are payments on account?
Due 31 January and 31 July
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, including changes in the rules due to the ongoing coronavirus crisis.
Why do I have to make payments on account?
Payments on account are designed to spread tax payments across the year, getting rid of the burden of paying all of the tax you owe in one big lump sum at the end of January.
However, it can cause problems the first time you do it.
For instance, if you have to start making payment on account payments for the 2022-23 tax year, come 31 January 2023 not only will you have to pay your tax bill 'as usual' for the 2021-22 tax year, but you'll also have to stump up half of your projected tax bill for 2022-23 on the same day.
When are payments on account due?
The first payment on account is due by 31 January. The second instalment is due by 31 July.
How are payments on account calculated?
The calculation is fairly simple. HMRC assumes you'll earn the same amount as you did in the previous tax year, but splits the amount in two.
For example, if you paid £10,000 tax in the previous tax year, you will make two payments of £5,000 for the current tax year - £5,000 on 31 January and £5,000 on 31 July.
What if my tax bill exceeds, or is lower than, my payments on account?
If you make more than you did in the previous year, you'll have to pay a ‘balancing charge’, which is just any tax you're still left owing. This must be paid by 31 January after you've submitted your tax return. Your next payment on account will also be due.
If you make less than you did in the previous year, HMRC should issue you with a refund, and your payments for the following year will be reduced.
For example, say the amount of tax you paid in 2020-21 was £10,000. This resulted in two payments on account of £5,000 during the 2021-22 tax year.
However, after submitting your tax return, it turns out you actually owe £12,000 for 2021-22.
On 31 January 2023, you’ll have to pay £2,000 in additional tax. What's more, your payments on account during 2022-23 will increase to £6,000 (£12,000 divided by two), meaning you’ll have to pay:
- £8,000 by 31 January 2023
- £6,000 by 31 July 2023
Are payments on account compulsory?
Not everyone who is self-employed has to make payments on account.
If you owe £1,000 or less, you can just make a single tax payment. The same applies if more than 80% of your tax bill was paid via PAYE.
Can I reduce my payments on account?
If you think your profits will be less than they were the previous year, you can apply to reduce your payments on account.
You can either:
- fill out form SA303 and send it to your local tax office
- log in to your online Personal Tax Account and visit the ‘reduce payments on account’ section.
You won’t need to provide any evidence that your tax bill will be lower, but don't be tempted to falsely make your payments super-low. If it turns out that you owe a much higher figure after having the payments on account reduced, HMRC could charge you interest on the difference owed.
Conversely, if your payments on account cause you to overpay tax, you’ll receive interest on the surplus when it's paid back to you.
What do I do if I can't make payments on account?
If you’re struggling to pay your tax bill, be it on 31 January or 31 July, there is help at hand.
Contact HMRC and make a ‘payment proposal’ – where you can suggest 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.
What are self-employed 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.
- Find out more: self-employed tax allowable expenses
Ways to pay your self-assessment tax bill
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) plus your first payment on account and 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 charge.
You can no longer pay HMRC via credit card or at the Post Office.
- Find out more: small business tax: what you need to pay - if you're a small business owner, this guide lists all of the taxes you'll need to deal with
How to keep your records
Regardless of whether you opt to file your tax return using the paper forms or online, you must keep the records and documents that give evidence of the information you've stated in your return.
This could include things like bank statements, receipts and contracts - anything that documents your income and business dealings.
You must keep this evidence because HMRC has the right to request to see them if it carries out an investigation into your tax liabilities - and having everything to hand could save you from paying a penalty if HMRC believes you've made a mistake on your tax return.
Check our Q&A below for anything you want to know about self-employment tax and record keeping.
Which records should I keep?
If you’re a sole trader or partner in a business partnership, you need to keep records of your business income and expenses.
This includes all sales and income, all business expenses, VAT records, PAYE records. You also need to keep records of your personal income.
If you run a limited company, you must keep details about the company itself, financial and accounting records, and details of directors, shareholders and company secretaries and associated promises and transactions.
Why do I have to keep these records?
While you don’t need to send in these records when you submit your tax return, you’ll need them in order to work out the profit or loss you've made.
These figures must be submitted on your tax return. You'll also need them to show to HMRC if asked for them.
HMRC has the power to visit your premises and inspect your books at any time, so it is vital to keep good records.
What sort of proof do I need to keep?
You need to be able to back up your records, if asked.
You should keep and file all receipts for goods and stock, bank statements, chequebook stubs, sales invoices, till rolls and bank slips.
What should be included in my records?
You need to choose between traditional accounting or cash basis reporting.
Cash basis reporting is best for incomes of £150,000 or less, and is when you only record income or expenses when you receive money or pay a bill.
Traditional accounting is recording income and expenses by the date you were invoiced or billed, so you also need to record:
- what you’re owed but haven’t received yet
- what you’ve committed to spend but haven’t paid yet
- the value of stock and work in progress at the end of your accounting period
- your year-end bank balances
- how much you’ve invested in the business during the year
- how much money you’ve taken out for your own use.
How should I keep my records?
There are no rules on how to keep your records – they can be on paper, digitally (on a spreadsheet, for example) or with book-keeping software.
Bear in mind that HMRC can charge a penalty if your records aren’t accurate, complete and readable – so however you record them, it’s worth keeping them as neat as possible.
How long should I keep my records?
You must keep these accounts and records for at least five years from 31 January following the relevant tax year, in case HMRC wishes to inspect them and query your return.
So, for the 2021-22 tax year, this means you must keep records until 31 January 2028. Failure to do this could cost you a £3,000 fine.
It might be worth keeping records for 20 years, given that this is the time limit for an HMRC investigation if it suspects fraud.
What if my records get stolen, lost or destroyed?
If your records can’t be replaced, you must try to provide figures.
Tell HMRC when you file your tax return if you’re using estimated figures, or provisional figures – in this case, you’ll need to submit actual figures when they are available.
Submit your 2021-22 tax return with Which?
Get a head start on your 2021-22 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?.