As a self employed person you’ll pay income tax in the same way and at the same rates as you would for income for employment. You’ll have to complete a self assessment tax return and you will declare your self employed income separately on your return.
You will complete your self employment tax return for the period up to April 5th and pay tax on your self employed income up to that date. You can choose a different accounting period but you still pay tax for the 12 month period up to April 5th so for most people it is easier to use this as your accounting date (box 7 of the self employment pages of the short self assessment return). If you choose a different accounting period you will have to submit a full self assessment return.
You’ll also pay national insurance as part of your self assessment but the rates are different from someone who is an employee.
Deadlines and payments on account
You’ll have to submit your self assessment tax return by January 31st for the year up to the previous April 5th. This is also the deadline for paying any tax and national insurance due for the previous tax year. You’ll have to arrange the payment yourself; it doesn’t happen automatically.
Unless the tax you owe is less than £1000 you’ll also have to pay tax on account for the subsequent tax year ie the 12 months beginning April 6th before the January 31st tax return deadline. This payment will be in two stages: half on January 31st and half on July 31st. Remember that by January 31st you’ll be 10 months into the tax year so you should already have set aside money for your tax liabilities; you can use the Triginta self employment tax and NI calculator to make sure you’re setting aside the right amounts of tax and national insurance.
HMRC will tell you what you payments on account you need to make when your return is submitted but, again, this payment doesn’t happen automatically so you’ll have to set it up.
You can ask for your payments on account to be reduced if you think your income will be lower this year than in the previous year.
What dates should I use to account for income and expenses?
For most self employed people the best way to declare income and expenses is by using the ‘cash basis’.
The cash basis means that you only pay tax on income when you receive it and you can claim for expenses when you actually pay them. At the end of the tax year, you don’t have to declare income you haven’t received before the end of the year, even if the work was done and invoiced at an earlier date.
The system is simpler to manage than the alternative accrual basis accounting method and probably helps you by ensuring that you don’t pay tax on income you haven’t yet received. But it is only available for businesses with a turnover of £150,000 or less and doesn’t apply to all types of business. You may need to take professional advice if you’re not sure.
To use the cash basis accounting scheme just tick the cash basis box (box 8) on the self employment pages of your tax return.
Making Tax Digital for the self employed
The government has an objective of changing the way all individuals and businesses submit their tax returns. This will not affect self assessment income tax returns for self employed people until 20210 at the earliest, and it is still not certain what changes if any will be made. But it is nevertheless worth being aware of the proposals to ensure you are prepared.
The roll out of MTD has been significantly delayed and, as things stand, the only businesses that are directly mandated are VAT-registered businesses (including sole traders registered for VAT) and then only for their VAT returns from April 2019.
The government announced in 20197 that MTD will not be mandated for other taxes, including income tax for the self employed, until at least 20210.
It is in any case not clear what if any changes would be made if and when MTD is rolled out further. The proposals on which the government initially consulted included quarterly submission of data, but not more frequent tax returns. Nearly 93% of people already submit their self assessment returns online and 99% of quarterly VAT returns are submitted online.
Triginta will be prepared for MTD if and when it is rolled out further and will ensure it is compliant with software requirements. But in view of the uncertainty surrounding the roll out we do not believe it is worth it for individual self employed people to make any changes or preparations.
What kind of records do I need to submit in my self assessment return?
If you are below the threshold for VAT, you can submit a short self assessment return to HMRC. This means that you can just record your income (turnover) and your total allowable expenses, rather than having to break your business costs down into different categories.
You do not need to submit all your business records with your self assessment return, but you must keep records of income and expenses including
- Receipts for goods and stock
- Bank statements and cheque book stubs
- Sales invoices
You must retain these records for five years after the January 31st submission deadline of the relevant tax year, so for example your records for the 2017-18 tax year must be kept until at least the end of January 2024.
Read the next section ‘Income Tax & NI‘