Learn the ins and outs of filing tax returns for your own self-employment, including how to select the appropriate accounting period and all you need to know about payments on account.
When you are self-employed, are you required to fill up and file a tax return?
If you are self-employed, you are required to submit an annual tax return using the self-assessment method.
You are required to provide specific information regarding all of the income that you have garnered throughout the relevant tax year. This can be deducted against any expenses and allowances for which you are eligible, which means that the amount of tax you owe will only be determined by the amount of your taxable income.
The approach that is known as “payments on account” requires that the tax that you owe be paid in two separate instalments, once in the spring and once in the fall of each year.
This article covers how payments on account operate, as well as how to decide on your accounting period and many other areas of self-assessment tax that you will need to consider when you are self-employed. If you are self-employed, you should read this guide.
What does the tax period for self-employment look like?
You have control over the dates that your tax is computed for, despite the fact that HMRC sets the deadlines for you to file your return and pay the tax that you owe. This is known as your “accounting period,” and it often lasts for a full year.
Due to the fact that the tax year ends on April 5 and HMRC states that accounts prepared to the 31st of March will count as being prepared to the end of the tax year, many sole proprietors choose to have their year end fall between the 31st of March and the 5th of April.
This means that your accounts will start over in accordance with the beginning of a new tax year, and you will have the maximum amount of time possible to pay the tax that you owe, which won’t be due until the 31st of January of the calendar year that follows the one in which you are currently living.
If this is your busiest time of the year at work, for example, you should consider moving the end of your accounting year to a different time of the year when business is slower and you have more time to complete your year-end accounts. Choosing this time of year won’t work for everyone, but it is a good option for those who can make it work.
The time frame used by HMRC to determine how much tax you owe is referred to as your “basis period.” It is almost always the same as your accounting period, and this is especially true if the end of your accounting year coincides with the end of the tax year.
Beginning in 2024–2025, a reform of the basis period
Regardless of when their accounting period begins, all unincorporated enterprises will be required to start using the period 6 April to 5 April as their base period beginning in April 2024.
The fiscal year 2023–2024 will be a transitional year during which companies may be required to compute a basis period that is longer than 12 months if their accounting period does not coincide with the tax year. This will take place during the transitional year.
Following the completion of the reform, many companies may discover that it is simpler to change their accounting period to run from April 6th to April 5th.
How exactly do tax payments operate for people who are self-employed?
Year 1: During your first year as a business owner, you will be subject to taxes on any income produced between the time you founded your company and the end of the tax year. For instance, if you opened your shop on February 5 and made a profit between that date and April 5 of the following year, you would be subject to taxation on that profit.
Year 2: During the second year, you will be subject to taxation on any profits made up to the “accounting date” for your company. In our case, this would be again on the 5th of February; therefore, you will be taxed on profits produced between the 5th of February and the 4th of February; in other words, you will pay tax for a second time on earnings made between the 5th of February and the 5th of April. This is what is known as “overlap earnings,” and it is possible to get a refund on it, but only after you have stopped trading.
In the third year, the amount of your tax bill will be determined by the profits made during your accounting year.
Tax obligations for those who are self-employed: essential information
What exactly is the “tax year”?
6 April-5 April
Every tax year begins on April 6 and ends on April 5. This means that any gains you produced during your accounting year, which will have finished between April 6 and April 5 of the following year, will be subject to taxation during the 2021-22 tax year.
Which of your profits are subject to taxation?
You are required to report any gains you made during this time period on your tax return for the fiscal year 2021–2022. For tax returns filed on paper, the submission deadline is October 31, 2022; for returns filed electronically, the deadline is January 31, 2023.
When are tax payments due?
The deadline for payment of any taxes owed for the 2021-22 fiscal year is the 31st of January, 2023. Interest will be charged on payments that are late, and the HMRC may impose additional late penalties.
What happens if you submit your return late?
If you send in your return later than required, you will need to file it online, and the software provided by HMRC will inform you of the amount of tax that is owed. Take into note that the most recent payment you made on the account is not necessarily factored into this computation.
Do you accept any other forms of payment?
If you have a tax liability of less than £3,000, are receiving a salary or pension, and file your return by the due date of 30 December, then the tax can be collected through PAYE in instalments throughout the course of the following year.
What exactly is meant by “payments on account”?
Due on the 31st of January and July
After you have operated your company for a full year, in addition to being obliged to pay taxes for the tax year that has just come to a close, you will also be needed to pay taxes for the current year in two separate payments. These transactions are referred to as “payments on account.”
In this question and answer session, we cover all you need to know about making payments on account, including any modifications to the guidelines that have been implemented as a result of the ongoing coronavirus outbreak.
Why am I required to make payments while I have a balance on my account?
The pressure of paying all of the tax you owe in one large sum at the end of January can be alleviated by taking advantage of payments on account, which are meant to stretch tax payments out over the course of the year.
Having said that, there is a possibility that it will be problematic the very first time you do it.
For example, if you are required to start making payments on account for the 2022-23 tax year, on the 31st of January 2023, you will not only be required to pay your tax bill ‘as usual’ for the 2021-22 tax year, but you will also be required to cough up half of your projected tax bill for 2022-23 on the same day. This is the case even if you are required to start making payments on account for the 2022-23 tax year.
When must payments be made on the account?
By the 31st of January, the initial payment on the account must have been made. The second payment must be made by the 31st of July.
How are the payments that are made on account determined?
The math should not be too difficult. The HMRC will calculate your tax liability based on the assumption that you will earn the same amount as you did in the previous tax year but will divide the total by two.
If you paid £10,000 in taxes during the previous tax year, for instance, you will need to make two payments of £5,000 during the current tax year; specifically, you will need to pay £5,000 on the 31st of January and another £5,000 on the 31st of July.
What happens if the amount of my tax bill is higher or lower than the payments I’ve already made?
If your income for the current year is higher than it was for the previous year, you will be required to pay a “balancing fee,” which is simply the amount of tax that is outstanding from the prior year.
After you have submitted your tax return, you have until the 31st of January to pay this. Your subsequent payment on the account is also due at this time.
If you have a lower income than you had the year before, HMRC is required to give you a refund, and your payments for the next year will be lowered to account for the lower amount.
Take, for instance, the year 2020-21, when the total amount of tax you paid was £10,000.
Because of this, for the tax year 2021–2022, there were two payments on account totaling £5,000.
However, following the submission of your tax return, it was discovered that you in fact owe £12,000 for the tax year 2021-22.
You will be required to make an additional tax payment of £2,000 on the 31st of January, 2023. In addition to this, the amount that you are required to pay toward your account during the fiscal year 2022–2023 will rise to £6,000 (£12,000 divided by two), which means that you will be required to pay the following:
£8,000 by the end of the 31st January 2023
6,000 pounds by the 31st of July 2023.
Are payments made on account need to be made?
There are exceptions to the need that those who are self-employed make payments on account.
If your tax liability is less than one thousand pounds, you can settle it all with a single payment. The same rule applies if you paid more than 80 percent of your tax payment through PAYE rather than another method.
Is it possible for me to get a discount on my account payments?
You have the ability to submit a request to have your payments on account decreased if you anticipate that your profits will be lower than they were the year before.
You can either:
Complete the SA303 form and submit it to the tax office in your community. After that, go in to your online Personal Tax Account and go to the section labelled “lower payments on account.”
You won’t be required to present any evidence that your tax bill will be lower; nonetheless, you shouldn’t give the impression that it will be significantly lower than it actually is. If it turns out that you owe a significantly larger sum after having the payments on account lowered, then the HMRC may charge you interest on the difference between the original amount owed and the new amount.
If, on the other hand, your payments on account result in your overpaying tax, you will be entitled to interest on the excess amount of tax when it is refunded to you.
If I am unable to make payments on my account, what should I do?
There is assistance available to those who are having trouble paying their tax payment, regardless of whether it is due on January 31 or July 31.
You should get in touch with HMRC and submit a “payment plan,” which allows you to recommend an alternate method of paying your account, such as by making payments on a monthly or quarterly basis.
Before deciding whether or not to accept the offer, the HMRC will give this suggestion careful consideration and may inquire further about the other assets you possess, such as savings and investments.
What exactly are losses for self-employed people?
If you have a tax year in which you incur a loss rather than a profit, you have the option of “carrying forward” the loss so that it can be deducted from any subsequent earnings you generate from the same business.
You also have the option of immediately applying the loss to decrease your income tax liability (and in some cases, any capital gains tax liability) for either the current tax year or the tax year that just passed. During the first and last years of your company venture, you will have access to additional possibilities. See HMRC helpsheet HS227 for further details.
Find out more about the tax deductions available to those who are self-employed.
Alternatives for paying the tax you owe based on your own self-assessment
The method of payment you choose will determine the amount of time you need to set aside to make your payment to HMRC.
Be sure to mark the dates in your calendar for the payments that are due: the 31st of January for any tax you owe for the previous tax year (also known as a balancing payment), as well as your first payment on account, and the 31st of July for your second payment on account.
The UK’s HMRC tax agency has provided a breakdown of how long different types of payments can take.
Same-day or next day:
Banking done either online or over the phone
Debit card online
Where you bank or where your building society is
Three full days of work:
In the event that you have already established a direct debit arrangement with HMRC,
Send your payment by mail with a check.
Five full days of work:
If you haven’t already done so with HMRC, you can set up a direct debit.
In the event that the payment deadline comes on a weekend or a bank holiday, the payment must be sent to HMRC on the last working day prior to the deadline.
There may be a fee assessed for the late payment of a debt.
You are unable to make payments to HMRC with a credit card or at the post office at this time.
Learn more about it here:
What you have to pay in taxes if you own a small business – This tutorial provides a rundown of all of the many tax obligations that are associated with owning a small business.
How to properly maintain your documents
You are required to retain the records and papers that give evidence of the information you’ve indicated in your tax return. This is the case regardless of whether you choose to file your tax return using the paper forms or online.
This may contain items like bank statements, receipts, and contracts; basically everything that documents your company activities and income would fall under this category.
You are required to keep this evidence because HMRC has the authority to request to see it if it conducts an investigation into your tax obligations. If HMRC determines that you have made an error on your tax return, you may be subject to a penalty, but if you have all of the relevant documentation on hand, you may be able to avoid having to pay the penalty.
Check out our questions and answers below for any information you need on the taxation of self-employment and the maintenance of records.
What kinds of records are I required to keep?
You are required to keep records of the income and expenses of your business if you operate as a lone proprietor or are a participant in a business partnership.
This comprises all sales and income, as well as all business expenses, documents pertaining to VAT and records pertaining to PAYE. In addition to this, you are responsible for maintaining records of your own income.
If you are the manager of a limited company, you are required to keep records pertaining to the company itself, its finances and accounting, as well as the directors, shareholders, and company secretaries, as well as any linked transactions and promises.
Why am I required to keep track of all of these records?
You are not required to send in these records when you complete your tax return; nonetheless, you will need them in order to determine whether you have made a profit or a loss for the year.
You are required to include this information in your tax return. You will also need them to show HMRC in the event that they ask to see them.
Because the HMRC has the authority to come to your location at any time and review your books and records, it is essential to maintain accurate documentation.
What kind of evidence do I need to make sure I keep?
In the event that it is requested of you, you must be able to provide a backup of your records.
You need to make sure that you keep and file all of the receipts that you receive for goods and stock, as well as bank statements, chequebook stubs, sales invoices, till rolls, and bank slips.
What information ought to be kept in my records?
You have to decide if you will use standard accounting or reporting based on cash flow.
When using cash basis reporting, which is when you only record revenue or costs when you receive money or pay a bill, it is recommended that your annual income be no more than £150,000.
In traditional accounting, you record your income and expenses according to the date that you were invoiced or billed for them. Because of this, you also need to record the following information:
what is owed to you but which you have not yet received
the amount that you have promised to spend but have not yet paid for.
the worth of your inventory and any work that is still being done when your accounting period comes to a close.
your year-end bank balances
how much money you’ve put into the company over the course of the year and how much you’ve taken out for your own usage during that time.
How should I organise the records I keep?
Your records can be kept on paper, digitally (for example, on a spreadsheet), or with software designed specifically for bookkeeping; there are no laws governing how they should be kept.
Keep in mind that HMRC can charge a penalty if your records aren’t accurate, comprehensive, and readable; therefore, it’s in your best interest to keep them as clean as possible, regardless of the method you use to record them.
How far back should I go when looking at my old records?
In the event that HMRC would like to inspect these accounts and documents and question your return, you are required to maintain them for at least five years beginning on the 31st of January following the relevant tax year.
This means that you are required to preserve records until the 31st of January 2028 for the tax year 2021-2022. Should you fail to comply with this requirement, you risk incurring a fine of £3,000.
Given that the HMRC has a time restriction of 20 years to investigate a suspected case of fraud, it is possible that it will be beneficial to maintain documents for this length of time.
What should I do if my records are taken, misplaced, or destroyed?
You are required to make an effort to give figures in the event that your data cannot be replaced.
When you complete your tax return, let HMRC know if you are using estimated data or preliminary figures; if so, you will be required to supply actual figures as soon as they become available.