Tax Advice

Tax Guide For The Self-Employed

28 November 2017

Choosing to become self-employed is a big move with many important steps to take along the way.

We want to help you understand your tax as a self-employed person so we have put together this short guide.


I’ve decided to become self-employed, what’s the first thing I need to do?

The first thing you need to do is let HMRC know this by registering with them as self-employed.

This is quick and easy to do online which you can do here.

Uncertain if you are considered self-employed? Read our article on what is a sole trader?

This now means that you are responsible for calculating and reporting your taxable income to HMRC and you now have to follow the tax rules for the self-employed.



How do I get taxed?

Once you’ve registered as self-employed, you will automatically be sent a self assessment notice at the end of each tax year.

The tax year runs from 6th April to the 5th April each year.

You will need to work out your taxable profits from your yearly accounting period and report it to HMRC via the self assessment tax form.

Generally speaking, calculating your taxable profits is done by deducting your business expenses, annual investment allowances, capital allowances and losses from your yearly takings.

If you’re wondering what you can claim back as a self-employed sole trader, check it out blog here.

In your first year, you are taxed on profits and non-allowable expenses from the date you started to the end of the tax year. And this may not be a full 12 months. In fact, it probably won’t be the full 12 months.

So, for example, if you started on 1st January, you will be taxed from the 1st January to 5th April.

In the second year, you are normally taxed on profits and non-allowable expenses for 12 months to your accounting date in that tax year. Unless you have changed your accounting date, you will then be taxed from the 6th April to the following 5th April.

After that, your accounting year will cover a period of 12 months and your tax bill will be based on the profits you made during the accounting year.


What is the accounting year for the self-employed?

Your yearly accounting period will run for 12 months in which your profits will be calculated from.

You can choose when your accounting year ends, which can be any day in the year that suits you. Although from a tax point of view, the easiest date to choose is 5th April.

Choosing a date earlier in the tax year gives you more time to get your accounts made up.

However, if you choose a later date to end your accounting year, you could face penalties if you are late with deadlines.



What is the current rate of tax?

For the 2017/18 tax year, the personal allowance has been increased to £11,500. This is the amount you can earn before paying any income tax at all.

For income in 2017/18 above this threshold, you will be taxed at the following levels:

  • Basic Income Tax Rate: 20% on income up to £45,000
  • Higher Income Tax Rate: 40% on income between £45,001 and £150,000
  • Additional Income Tax Rate: 45% on income over £150,000.


How do I pay and what are the deadlines for my tax return?

In April each year, you will receive a letter from HMRC telling you to complete your tax return online or to fill out a paper tax return.

Each tax year runs from 6th April to 5th April. So the 2016-2017 tax year covers profits made between 6th April 2016 and 5th April 2017.

The profits you made in this period must be declared in your 2016-17 tax return.

Deadlines for submission are 31st October 2017 for a paper return and 31st January 2018 for an online return.

Tax due must be paid by 31 January 2018.

If you sent in your return by 31st October, HMRC will work out your tax for you.

If you send in your return later, you must file it online and HMRC’s online system will tell you how much tax is due, although it doesn’t always take account of your most recent payment on account.

If you are new to being self-employed, your first year tax bill can often be a lot higher than expected due to payments on account.



What are Payments On Account?

Once you start paying your tax through the annual self assessment tax system, you will also have to make ‘payments on account’.

These are essentially advanced payments for the current tax year.

So after your first year of business, as well as paying tax for the tax year that’s just ended, you will also pay tax for the current year.

That’s why your first tax return might be higher as no advanced payments on account have been made.

It is done in two instalments. The first on the 31st January along with the previous years tax. The second remainder on 31st July.

It is normally half the tax you’ve paid for the previous tax period.

So, for example, say you are due to pay £2,000 for the full previous tax year on the 31st January. You would then also pay another £1,000 payment on account on the 31st January as well. And then the further £1,000 on the 31st July.

If you make more than the previous year and therefore owe more tax, a third instalment called the balancing charge will be due on 31st January, along with the new tax year’s first payment on account.

And if you make less than the previous year, you get a refund.

Not everyone who is self-employed has to make payments on account. If you owe less than £1,000 you can pay it in one go by the following 31st January.


Do I have to pay National Insurance Contributions

Yes, being self-employed means that, in addition to paying income tax, you will also need to make national insurance contributions (NICs).

There are currently two types of NICs that you have to pay.

Class 2 NICs at a flat rate of £2.85 per week
Class 4 NICs at 9% on your earnings between £8,164 and £45,000 and 2% on any profits earned above this.

While Class 4 NICs will be collected via the Self-Assessment tax return as part of your annual income, Class 2 NICs are paid separately, usually by direct debit.

It’s also worth pointing out that Class 2 National Insurance Contributions for the self employed are to be abolished from April 2018 so you won’t have to worry about them for much longer.


We hope this article helped but if you are still uncertain about your taxes, please contact us online or call us on 0131 564 1192.