Posted: Thu 4th Jun 2021
Self-employment is a dream for many in the UK. Being your own boss has its fill of benefits, including choosing how you work, where you work and who you work with.
However, if you are self-employed, you'll need to submit an annual self-assessment tax return to HM Revenue and Customs (HMRC). Whether you're a freelancer or the owner of a limited company, discover how to pay self-assessment tax in the UK for your business.
If you're registered as self-employed, you'll be responsible for paying your taxes.
Self-assessment is the system HMRC uses to collect your National Insurance Contributions (NICs) and income tax for the previous financial year.
National insurance + income tax = 'Self-assessment tax'
In the UK, the current financial year started on 6 April 2021 and will end on 5 April 2022.
As salaries and paydays for employed people are typically fixed, national insurance and income tax are easily deducted. Even better, most companies will have a payroll department to handle all the paperwork.
That's not the case with self-employment, where earnings and pay dates are unpredictable.
Rather than filing a tax return every time you get paid for a job, self-assessment lets you pay your taxes at the end of your tax year.
The self-assessment tax period is another way of saying 'tax year'.
As mentioned previously, the tax year for most employed people ends on 5 April.
However, if you're self-employed, you can choose if your tax year ends on 5 April or 31 March.
Regardless of which date you choose, you'll need to pay your self-assessment tax by 31 January the following year.
Therefore, if your tax year ends on 31 March, you'll have roughly 300 days to pay your self-assessment tax for that year. If your tax year ends on 5 April, you'll have slightly less time to pay.
If you're newly self-employed, self-assessment can get tricky due to 'payments on account'.
'Payments on account' are additional self-assessment payments that self-employed people need to make on top of their bill for the previous tax year.
Confused? Don't be.
Imagine that your first tax year of self-employment ended on 31 March 2021. Let's also assume that your tax bill for that first year is £4,000, due by 31 January 2022.
With HMRC's 'payments on account' system, you'll also owe them 50% of your current tax bill, i.e. £2,000.
In other words, you'll need to pay £6,000 on or by 31 January 2022.
The remaining £2,000 needs to be paid by 31 July 2022.
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 go. However, it can be initially confusing and costly if you've only budgeted for the first year's tax bill, i.e £4,000.
If payments on account mean you can't afford to pay your tax bill, there are other payment options. You'll need to contact HMRC and agree on an alternative way of paying, either through monthly or quarterly payments.
Not everyone who is self-employed has to follow the payments on account system.
If your tax bill is £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 Pay As You Earn (PAYE).
If you've never filled in a self-assessment tax return before, it can seem complex. However, once you understand the process, it's relatively simple, as long as you have the relevant information to hand, including:
Your 10-digit Unique Taxpayer Reference (UTR). HMRC assigns each self-assessment taxpayer a unique 10-digit UTR to track their tax records. Your UTR stays with you all your life - similar to National Insurance numbers
Details of your untaxed income from the tax year, including income from self-employment, dividends and interest on shares
Records of any expenses relating to your self-employment
Any contributions to charity or pensions which might be eligible for tax relief
A P60 or other documents showing how much income you've received and already paid tax on
Keeping accurate records is essential if you want to pay the correct amount of tax. Accurate tax payments also help you measure the performance of your business over time.
An accurate self-assessment will help highlight important business metrics, including your profits, losses and future projections.
You will need to submit proof of all your income and expenses during the task year. Consequently, you should keep and file all receipts for goods and stock, bank statements, invoices, cheque book stubs, sales invoices, till rolls and bank slips.
Downloading an app like QuickBooks, GoSimpleTax or untied will help simplify the self-assessment process. With tools like these, you can upload receipts, statements and more, putting your documents in one place and making submission easier at the end of the tax year.
Get your first five transfers fee-free and save even more when you pay freelancers and suppliers overseas. Even better, you'll get your first transfer at a special exchange rate.