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How to pay tax on self-employed income

So you run your own business and are earning some income. Good for you! But you may be wondering how to pay your income tax and national insurance contributions on self-employed income. Look no further, in this article I will explain how it’s done.

Tax on self-employed income title image

Whether you’re a self-employed musician, graphic designer, or uber driver, you will need to pay tax to your local authorities. In this article, I will discuss taxes related to sole trader businesses in the UK.

How to report your self-employment income

If you are self-employed, you will need to inform HMRC how much income you have earned from your business. When you register as a sole trader, HMRC will send you a letter close to the end of the tax year explaining how to report your earnings.

If you earn over £1000 over the tax year from self-employment, you must register for Self Assessment. Once registered, you will need to keep track of your business income and expenses, submit a Self Assessment tax return each year, and pay the correct amount of income tax and national insurance.

If you earn over £85,000 in the tax year through self-employment, you will also need to register for VAT. This means that your business will need to charge VAT on your products and services, and submit recurring VAT returns to HMRC.

How do I submit my Self Assessment tax return?

Luckily, the process is quite simple. You can register for Self Assessment as soon as you have set up your business by filling out an online application on the UK Government website.

Once you have submitted the application, you will receive a letter stating your Unique Taxpayer Reference, and you will be set up for online services at the same time. Once you have activated your account, you will be all set to submit your tax return when the time comes.

The Self Assessment calculates how much income tax and national insurance you need to pay.

When do I need to submit my tax return?

Regardless of when you set up your business, you will need to submit your tax return by the deadline. It is possible to submit the return online, or by post. Submitting online will allow you to instantly see your bill.

If your business was trading in the last tax year (April 6th 2019 - April 5th 2020), then you will need to submit your return based on these deadlines:

Chart showing tax deadlines

If you miss the deadline, you will incur a fine. The automatic fine is £100 for late filing, but you may be charged an additional fine based on your circumstances. If you miss the deadline for paper filing, you may still have the option of submitting the return online.

What if I need help with my tax return?

HMRC understands that tax returns can sometimes be difficult and complex. If you have questions or are not sure how to fill it out, you can easily contact HMRC for help.

You can find the contact details on the HMRC website. You can contact them via phone, webchat, twitter, or post.

What do I do if I make a mistake on my tax return?

Don’t fret - everyone makes mistakes. If you notice that something was entered incorrectly after you have submitted the return, you can make changes.

You can make amendments up to 12 months after the deadline (January 31st). To make changes, simply login to your account, make the necessary changes and file it again. If you submitted the return by post, simply send an updated version of the tax return and write ‘amendment’ on each page.

If the amount of tax you owe changes due to the correction, your bill will be updated and you can pay it as normal.

If you miss the amendment deadline, you will need to write to HMRC to make the changes.

How much tax do I owe from self-employment?

If you want an estimate of how much you will pay, there is a calulator to help you plan and budget for your bill.

It will basically calculate the same amount as if you were an employee of a company. This means that on income up to £12,500 (personal allowance), you will pay 0% tax. For income between £12,501 - £50,000 you will pay 20% tax. For income between £50,001 - £150,000 you will pay 40% tax. Finally, for income over £150,000, you will pay 45% tax.

Chart showing tax rates

When do I need to pay the bill?

When you submit your tax return, you will be notified of how much tax you owe. You pay tax on your profits, as well as any other income you earned throughout the tax year. This includes both income tax and National Insurance.

In most cases, you pay the tax bill in 3 instalments:

  • January 31st in the current tax year: you pay 50% of the prior year’s bill. This is referred to as the first payment on account.
  • July 31st following the tax year: you pay 50% of the prior year’s tax bill. This is referred to as the second payment on account.
  • January 31st following the tax year: you pay any remaining balance, plus the first payment on account for the new tax year. This is referred to as the balance payment.

A payment on account is essentially paying some of your tax bill in advance. I will outline an example below to further outline the payment dates.

Changes to self-employment tax due to the coronavirus

Many people and businesses have been affected by the pandemic, so the UK government has introduced changes to the tax system to help businesses during this unprecedented time.

The first change introduced was to defer the second payment on account that was originally due July 31st 2020, to January 31st 2021. You do not need to apply for the deferral, it is automatic. You will not be charged any late fees. This change only affects the 2019/2020 tax year.

For the most up to date information and relief due to the pandemic, I would suggest taking a look at the UK Government website.

Self-employment tax example UK

Daniel made £30,000 (£2,500/month) for the 2018/2019 tax year through self-employment. Using the calculator on the UK Government website, he owes the following tax for the 2018/2019 tax year:

Chart showing tax owed example

According to this information, Daniel’s first payment on account for the 2018/2019 tax year will be January 31st 2020. The second payment will be on July 31st 2020. The balance payment will be on January 31st 2021 which also includes the next tax year's first payment on account.

Daniel will pay his bill for the 2018/2019 tax year:

Chart showing tax payment dates

Katie
Written by
on 03/07/2020