Frequently Asked Questions
What do I need to do?
How do I register?
What records do I need to keep?
What tax do I pay and when?
What are payments on account and why must I pay them?
What’s involved with a Tax Return?
Do you have a question about self employment that’s not listed here? Please ask us via our contact form.
What do I need to do?
If you’re starting self employment, you need to register with HMRC within 3 months of starting to trade. Usually, you start to trade the day you open for business to the public, or make your first sale. If you leave registration until after 3 months, you may be liable for a fine.
Registering for self employment will make you liable for National Insurance and also to complete a self assessment tax return.
How do I register?
Details on how to register can be found on HMRC’s website here. You can register online, by phone on 0845 915 4515 or by post.
What records do I need to keep?
It is advisable but not obligatory to keep business transactions in a dedicated business bank account. This keeps things simpler.
You should keep a record of:
- Your sales (turnover)
- Your expenses.
Expenses that are wholly and exclusively for business can be offset against your turnover to reduce your taxable profit:
- Costs of goods bought for re-sale or goods used
- Car, van and travel expenses
- Wages, salaries and other staff costs
- Rent, rates, power and insurance costs
- Repairs and renewals of property and equipment
- Accountancy, legal and other professional fees
- Interest and bank and credit card etc. financial charges
- Telephone, fax, stationery and other office costs
- Other allowable business expenses
Note certain expenses are not allowable against tax (despite them being business expenses). Notable examples include client entertaining, ordinary clothing (even if it’s a suit you’d only wear for work; specialist protective clothing is allowed), the private use proportion of your motor expenses (for example if you use you car for both business and domestic/pleasure purposes).
Keep a record of how much you spend on each expense category; the total amount for each goes onto your Tax Return.
For a low cost, complete accounting service that looks after all of this for you, look at our All Beans Counted service.
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What tax do I pay?
Self employed people pay Income Tax and National Insurance.
You are taxed on your profit.
Profit is Income (sales, turnover) minus allowable expenses.
Income tax is currently (2009-10 tax year) nil for the first £6475 earned in the tax year, then 20% on earned income up to £37,400. Earned income above this is taxed at 40%.
National Insurance is payable in 2 parts.
- Class 2 NI – currently £2.40 per week.
- Class 4 NI – payable, like tax, on profits. Currently 8% on profits from £5715 to £43875 per year and 1% on profits above this.
For more detailed information see our National Insurance article.
Income Tax and Class 4 National Insurance are both payable by 31st January following the end of the tax year. They are calculated when you complete your self assessment tax return.
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What are payments on account and why must I pay them?
If the tax and and class 4 NI you owe from your tax return is over £1000, you will need to pay payments on account. This can be a bit of a shock in the first year – as well as paying the tax due, you will be required to pay 50% of this on top, a ‘payment on account’ for the next tax year. You then have to pay the same again by 31st July of the same year. While at face value this sounds quite unfair, you are not actually paying tax in advance.
Payments on account can be a little tricky to understand, so here’s an example:
Example 1
Tax year 2008-09. Tax and Class 4 NI due £1200
Payable by 31st January 2010 – 10 months after the end of the tax year.
Tax due is over £1000 so 50% payment on account is needed for tax year 2009-10: £600
Total Payable 31st January 2010 £1800 (£1200 + £600)
Total payable 31st July 2010 £600
As these payments are for the tax year 2009-10, they are still payable in arrears; by January 2010 you will be paying £600 towards profits earned in the 10 months since April 2009. By July 2010 the 2009-10 tax year has been over for 4 months.
Come 31st January 2011, your next tax return needs submitting. For the sake of simplicity, let’s say the tax due is £1200 again.
Example 2
Tax due is over £1000 so 50% payment on account is needed for tax year 2010-11: £600
Total Payable 31st January 2010 £600 (£1200 – £1200 already paid, + £600)
Total payable 31st July 2010 £600
After the first year, payments on account make things much more manageable.
As it’s unlikely the tax due will be an identical amount in subsequent years, here are two examples of how its works if the tax due is higher, or lower than the previous year:
Example 3
Tax year 2009-10. Tax and Class 4 NI due £1600
Tax due is over £1000 so 50% payment on account is needed for tax year 2010-11: £800
Total Payable 31st January 2010 £1200 (£1600 – £1200 already paid, + £800)
Total payable 31st July 2010 £800
Example 4
Tax year 2009-10. Tax and Class 4 NI due £1000
Tax due is over £1000 so 50% payment on account is needed for tax year 2010-11: £500
Total Payable 31st January 2010 £300 (£1000 – £1200 already paid, + £500)
Total payable 31st July 2010 £500
If you think your profits for the following year will be less than the previous year, you can apply to reduce your payments on account via your tax return. However, if you underestimate the tax due and it ends up being higher than the payments on account paid, you will be liable to pay interest on the excess.
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What’s involved with a Tax Return?
A tax return should be issued to you for the tax year in which you registered for self employment. So, for example, if you register as self employed on 1st May 2009, that’s in the 2009-10 tax year and so you will be issued with a tax return to complete shortly after 5th April 2010. It will need to be submitted by 31st January 2011 (if you file online; paper returns must be in by 31st October 2010).
You will have to put all your income for the tax year on the tax return, not just your self employment. If you file online, it will calculate your tax for you. If you file on paper, you may have to calculate your tax yourself.
Examples of other income that needs to go on the tax return includes:
- Employment income (figures come from your P60 or P45)
- Interest income from banks/ building societies
- Taxable benefits such as Job Seekers Allowance
Income that doesn’t need to go on a tax return includes:
- Interest received from ISAs
- Working Tax Credits
If you plan on completing your own tax return, please have a look at the form well in advance of the deadline to make sure you’re happy with completing it yourself. If you aren’t, why not ask us to help? We can look after everything for you with our All Beans Counted service.
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Do you have a question about self employment that’s not listed here? Please ask us via our contact form.
