Self employment and taxes

Now you’re running your own business, ensuring that you are compliant and pay tax is one of those things that is your responsibility- the buck stops with you. You’re now responsible for paying the correct amount of tax along with mandatory National Insurance contributions – both things that you want to understand and get right , and from day 1.

If you’re self employed your taxes are done through a process called self-assessment. This  involves submitting your details – including your income and outgoings to HM Revenue & Customs (HMRC) for the tax year just ended (tax years begin and end in April but returns are submitted by Jan 31st of each year).

It’s also important to keep an eye on the Chancellor’s budget statements where quite often changes to the taxation system are made. Generally speaking you won’t need to do anything yourself as these changes are calculated for you through the HMRC filing system but it’s still a good idea to know what you will or won’t be paying over the coming months- and budget accordingly!

To begin with you’ll need to know the differences between being a sole trader or company director, and importantly what this means with regards to paying income tax. HMRC have more information available about choosing the most appropriate business structure for your situation and you can find out all the details here.

  • Sole traders pay income tax once their profits are above their personal tax allowance of £12,570 (Correct as of March 2024).
  • Company directors tax liability is based on the  salary they take from the business. This tax will be paid according to the same tax thresholds as any other employee, and is usually collected via PAYE.

*Important!! Once you’ve made the decision to become self-employed you must register with HMRC within three months-or you face a fine of £100.

Registering is simple but to get more information on registering or to get a CWF1 form to inform HMRC of your change in circumstances, call the HMRC ‘Newly Self-Employed Helpline’ on 0300 200 3500 or register online at HMRC.

Here are a few other important things you need to know to make sure you’re on the right road to being tax efficient and compliant:

Paper or digital

  • Your taxes can be filed online or on paper. Online is simpler and it gives you more time to fill it in- plus you can check your account at any time.

Keep in mind any tax due at the end of the year

  • What you will owe will depend on a number of factors, including the amount your business turns over each year and whether you’ll need to pay Class 2 or Class 4 National Insurance. The most reliable way of budgeting for your annual tax bill is to use HMRC’s online tax calculator – but we recommend you think of saving a third of your income!

Accountant or go it alone?

  • This is really up to you and should be based  on your experience of dealing with money tax and bookkeeping. Using a professional accounting service could be a good idea if you’ve no experience in handling your own tax return- at least until you get a feel for the system and what is expected. For self assessment queries you can contact HMRC here.

When do you start paying tax?

  • You can check all dates via the HMRC website, but the most crucial are October 31st, when paper tax returns are usually due, and January 31 (online returns).

What are tax payments on account?

  • After your first full year of business you may be asked for ‘payments on account’ for the current year’s estimated tax, which is a way of spreading tax payments that can be paid in addition to the tax due for the past year.

There are usually two payments, one on 31st January and another on 31st July, meaning that – in effect – you could be paying one-and-a-half times the amount you were expecting in January and 50% six months later.

If these feel too onerous – you can create monthly payments, once you’ve agreed with HMRC on how much.

What happens if I don’t pay the tax I owe to HMRC?

  • This is definitely something that you don’t want to do. Non-payment or failure to pay the correct amount of tax on time could result in a large fine or penalty.

What kind of records should I keep for my taxes?

  • Keep details of your personal and business income; sales invoices; receipts for payments made; business expenses; VAT records if you’re registered for VAT (which from April 1st 2024 applies to businesses which have a turnover greater than £90,000); REMEMBER- All of your paperwork must be kept for a minimum of five years after the submission deadline of the relevant tax year.

Reading all of this might have you in a bit of a panic but don’t worry, you can do it. Navigating the tax system when you’re self-employed can be a serious learning curve but arguably it is one of the most important things for you to not only understand but also to adhere to. The government’s Revenues and Customs website has numerous factsheets and runs free classes to help you, and of course Tree Shepherd is here to support you with workshops, courses and mentoring.