How do I pay tax on self-employed income?
This section looks at how you report your income to HM Revenue & Customs (HMRC) so that you pay the right amount of tax.
When you have calculated your taxable profits from self-employment, you will need to report that income to HM Revenue & Customs' (HMRC) so that you can pay the correct amount of tax. The way you currently report the income is by completing a tax return form under the self assessment system. The idea of self assessment is that you are responsible for completing a tax return if you need to.
Once you have registered as self-employed with HMRC you will receive a notice shortly after the end of the tax year to tell you that you need to complete a tax return for the tax year that has just finished. See ‘how do I register for tax and National Insurance?’ for more information.
In 2015 the Government announced their intention to abolish self assessment tax returns. This will not happen before 2020 at the earliest. The tax return system will be replaced by HMRC’s new ‘Making Tax Digital’ regime. This is still in development, but trials of the new programme are being undertaken during 2018 and 2019. For more information, see our section, ‘What is Making Tax Digital for Business and how will it affect me?’.
This depends on the date of issue of the notice that HMRC send you to tell you to complete a tax return and whether you complete your tax return on paper or online. The table below summarises the position.
|Date of tax return or notice to file issued||Deadline for lodging paper return||Deadline for lodging return when HMRC will calculate tax||Deadline for lodging return online|
|On or before 31 July||31 October||31 October||31 January|
|1 – 31 August||3 months from date of notice||31 October||31 January|
|1 September to 31 October||3 months from date of notice||2 months from date of notice||31 January|
|After 31 October||3 months from date of notice||2 months from date of notice||3 months from date of notice|
There are penalties for missing the deadlines for filing tax returns.
If you miss the submission date an automatic penalty of £100 for late filing submission will be charged even if you have no tax to pay or you have already paid the tax you owe. See our penalties page for more information.
If you have manually submitted a paper return after its due submission date do not then submit the return online and hope to avoid the penalty charge as HMRC will accept only the first return So for example - Rashid sends in a paper 2017/18 self assessment tax return on 30 November 2018. He then gets access to the internet through his work and decides mistakenly that if he sends in his tax return online, he can cancel the paper one and extend the deadline for submission to 31 January 2019. This is not the case – HMRC will take the date you send in your return for any year as the date they receive the first return whether it be a paper one or online.
However if you miss the paper return filing deadline you may still have time to register with HMRC for online filing (if you are not already registered) and then submit the tax return online by the online filing deadline and so avoid a late filing penalty.
An important point to note for those in business is that at the moment HMRC still do not provide an online partnership return. Therefore if you cannot file the partnership return by other means (eg via a tax adviser or using 3rd party software) you must file a paper version of the return by the relevant due date to avoid late filing penalties.
If you get a tax return, please do not worry if you are not sure how to fill it in. You can contact HMRC for help. If you are concerned about completing the form contact the phone number on any of your self assessment correspondence or HMRC's Self assessment helpline number. Alternatively you may wish to contact the charity TaxAid who offer help to those on low incomes with tax problems. They can be contacted via their helpline 0345120 3779 (10 am – 12 noon).
If after you have filed your tax return you become aware that an entry is incorrect, you can amend that return. You have up to 12 months from 31 January following the end of the tax year to which the tax return relates (or if the notice to file a return was issued after 31 October, you can amend the tax return within 15 months of that notice being issued).
Therefore if you need to amend your 2017/18 tax return you normally have until 31 January 2020 to make the amendment. This applies whether you manually filed a paper version of the return or you filed online. Or if, for example, you did not receive a notice requiring you to file your tax return for 2017/18 until 12 December 2018, then you can amend it up until 11 March 2020.
If you need to amend your tax return outside of these time limits then you need to notify HMRC so that your tax position can be corrected. If additional tax is due HMRC should issue a revised calculation once the mistake is rectified and there may be penalties. If tax is overpaid due to the mistake, you should make a claim for overpayment relief to obtain a refund. You can read about how to do this in the section ‘how do I claim tax back if I am in self assessment?’.
When do I pay income tax on my self-employed profits?
You pay tax on your self-employed profits at the same time as you pay tax on all of your other income. Remember you pay Class 4 National Insurance contributions (NIC) at the same time as your income tax. From here on, we will refer to income tax, but that should be taken to include your Class 4 NIC.
Generally speaking you pay your income tax in three instalments as follows:
|31 January in the tax year||50% of prior year liability (known as first payment on account)|
|31 July following the tax year||50% of prior year liability (known as second payment on account)|
|31 January following the tax year||balance of any tax due (known as balancing balancing payment)
PLUS first payment on account for next tax year
Marcus has an income tax (including Class 4 NIC) liability of £2,500 for 2017/18 and he also has a Class 2 NIC liability of £148.20, Therefore his total payments for the 2017/18 tax year are £2,648.20. His income tax (including Class 4 NIC) liability for 2018/19 is £3,500, and his Class 2 NIC bill is £153.40.
His payments for 2018/19 are as follows:
|31 January 2019||£1,250 (50% of £2,500)|
|31 July 2019||£1,250 (50% of £2,500)|
|31 January 2020|| £2,903.40 which is £1,000 (balancing payment)
PLUS £1,750 (50% of £3,500)
PLUS £153.40 (Class 2 NIC)
You will see that each 31 January there are two amounts being paid – the balance of tax due for one year and a payment on account for the following year.
If you do not come within the ‘payments on account’ regime then you usually have to pay any tax that you owe to HMRC by the 31 January following the end of the tax year in question. So if you owe tax for the 2017/18 tax year this is due by 31 January 2019.
See our section about important dates for self-employment for more information.
Who calculates the amount of tax I owe?
If you submit your tax return on paper, HMRC normally calculate your tax for you and send you a tax calculation, form SA302. In order to receive a paper form SA302, usually you must submit your paper tax return before 31 October and ask HMRC to work out your tax, by ticking the relevant box on the tax return.
If you send a paper tax return after 31 October (which you should avoid doing, if possible, as you will incur a penalty for late filing), HMRC may calculate your tax, but they do not guarantee to tell you how much tax you owe in time for the payment deadline of 31 January.
If you submit your tax return online, HMRC’s online system will calculate your tax automatically, and you can view the calculation online or print it out.
Payments on account are basically a way of paying some of your tax bill in advance. You normally have to make a payment on account if your previous year’s bill (excluding Class 2 NIC) was over £1,000, unless more than 80% of your previous year’s tax was taken off at source. Tax will be taken at source for example, if you are employed, through Pay As You Earn (PAYE).
Robert's income tax liability (excluding Class 2 NICs) for 2017/18 is £2,800. PAYE and tax paid at source cover less than 80% of the total due. Robert will need to make payments on account for 2018/19 (the year to 5 April 2019).
These payments on account are based on your total tax and national insurance bill for the previous year but excluding Class 2 NIC. So you must first deduct any Class 2 NIC amount and you will then pay half of the remaining amount as a payment on account on 31 January during the tax year and half on 31 July following the tax year.
On 31 January you also pay any balance of tax due for the previous tax year together with the Class 2 NIC due for that year, so you may have two amounts to pay (the balancing payment and the first payment on account for the current tax year),but you can pay both together as a single total.
On 31 January 2019 Robert will need to pay his 2017/18 tax liability and his Class 2 NIC for 2017/18 and will also need to make a payment on account for the tax year 2018/19 (year ending 5 April 2019).
His 2018/19 payments on account will be based on half of his 2017/18 tax liability.
Robert will therefore need to make payments on account of £1,400 on 31 January 2019and £1,400 on 31 July 2019.
If HMRC make an amendment to your return or you notify them of an amendment that will increase the tax due, any extra tax will be payable 30 days from the date of the amendment although interest will run from the date that the tax should have been paid.
I expect my tax bill to be less this year than last year. What can I do?
You can apply to reduce your payments on account. You can do this at any time, using form SA303 either online or in paper form up to when the balancing payment is due. You can also make the claim on the previous year's tax return giving details of the circumstances in the additional information box at the end of the form.
Please bear in mind that if you reduce your payments on account below what they should in fact have been you will have to pay interest on the shortfall from the date each payment on account was due and in some cases HMRC may charge a penalty if the reduction is excessive.
Robert's income for 2018/19 is likely to be much lower than that for 2017/18, so he can claim to reduce his payments on account. Robert works out that he will only have a tax bill for 2018/19 of around £2,200. The reduction will be £600. He therefore claims to reduce each of his 2018/19 payments on account by £300.
On 8 February 2019 Robert realises that he has reduced his payments on account by too much. He thinks he will have a tax bill for the year 2018/19 of nearer £2,500 and not £2,200.
Robert contacts HMRC to let them know he will need to pay more tax on each instalment. He has already paid the 31 January 2019 instalment of £1,100 (half of £2,200) so he needs to pay a further £150 on that instalment and he will also need to pay £1,250 by 31 July 2019. He sends a cheque with his letter, which HMRC received on 12 February 2019.
The July instalment was not due when Robert notified them so there is no extra interest to pay but he will have to pay interest on the additional £150, which should have been paid with the first instalment on 31 January 2019. The interest will run from 1 February 2019 to 12 February 2019 – the date HMRC received payment of the £150.
I have already paid a payment on account, but now realise I paid too much. What can I do?
You should still complete form SA303. Any excess that you have paid will be refunded to you as long as it is at least 30 days until your next payment is due. If your next payment is due within 30 days, the refund will be held and will be set against the next payment due.
I have never paid payments on account before, but this year I have been asked to pay. Why is that?
The fact that you have to make payments on account this year suggests that either your income has increased, or that a higher proportion of your income has not suffered tax at source. You only make payments on account if your previous year’s tax and National Insurance bill was above £1,000 and only then if less than 80% of the liability was collected by being deducted at source from the income.
It can be quite a shock to your cash flow when you first move to payments on account. It may help you to put a certain amount each time you get paid into a different bank account. If you submit your tax return as soon as possible it will give you more time to save up for both the current tax which is due and your payments on account for the following tax year.
Factsheet on Payments on Account for those new to self-assessment
If you are new to self-assessment, you may find our factsheet ' First year of self assessment? Don't get caught out by payments on account' helpful. Amongst other things it contains suggestions on how much you might need to set aside for your first tax bill.
You will not automatically be issued with a payslip by HMRC in advance of the payment dates on 31 January and 31 July. If you do not receive a payslip you should organise payment anyway otherwise you might incur a fine for late payment and not receiving a payslip from HMRC will not be accepted by HMRC as a reasonable excuse for late payment.
There are various ways to pay and these are explained on GOV.UK.
If you are having financial difficulties, you should consider a time to pay arrangement.
I am also employed. Can my tax be collected via my code number?
Provided the tax outstanding is less than £3,000 it may be collected via your PAYE code number as long as that would not mean that more than 50% of your salary as an employee was collected for tax. If you earn more than £30,000, a higher amount may be collected via your code number.
If you want to take this option, you will need to send in (“file”) your tax return by 31 October on paper, or by 30 December if you are lodging online. If you have filed within these time limits and the tax does not appear to be collected this way, you can contact HMRC to query this.
What happens if I pay my tax late?
You will be charged interest from the date the payment was due until it is paid. You will also be liable to a penalty if your balancing payment is late.
I am having financial difficulties. Do I have to pay the whole bill at once?
Strictly, yes, but if you cannot pay the amount due then you should contact HMRC to discuss the possibility of a time to pay arrangement as soon as possible. You may get a more favourable arrangement if your tax payments are up to date prior to this point and you contact HMRC in advance of the bill falling due.
When you contact HMRC you will need to have certain information to hand, and you will be expected to make an offer to HMRC as to how you propose to settle the outstanding amount - what you can afford to pay and what period of time you need to make the repayments. They will also ask you how else you have tried to raise finance to pay your bill; for example applying for a bank overdraft. If HMRC do not agree to your proposal in its entirety, it should form the basis of your discussions to reach an acceptable repayment arrangement.
HMRC’s ‘Making Tax Digital’ programme is being phased in over a number of years into different areas of the tax system, following the announcement in 2015 that it was the Government’s intention to eventually abolish the self assessment tax return.
Digital tax accounts for both individuals (personal tax account) and those in business (business tax account) are now available to most people and these allow you to interact digitally with HMRC in connection with tax matters, and other matters such as National Insurance contributions records, state pension entitlement, etc.
‘Making Tax Digital for Business’ is currently in the testing phase with pilots and trials being run during 2018. It is not due to become compulsory until 2020 at the earliest, and then only for businesses that are VAT registered. The regime will require businesses to
- keep their business records in some kind of digital format. This is likely to mean that most businesses will either have to use specific accounting software packages or apps or maintain spreadsheets to record their business transactions. More details on the types of record keeping systems that will be available will be published in due course.
- Submit quarterly updates to HMRC to declare their business income and expenses for the three month period covered by the update. The precise details of what will be required in the updates have not yet been finalised, but the intention is for the reports to be automatically generated by the record keeping system.
- Submit an ‘end of year declaration’ to confirm the final taxable profit for the business, and to provide details of any other taxable income in the tax year.
Certain businesses will be able to apply for exemption from this system provided they have good reason for not being able to comply with it, for example unreliable broadband connection, disability, remote location etc. Also, assistance will be provided by HMRC to those who need help and support to comply with the system, although it is not yet known how this will be delivered.
‘Making Tax Digital for VAT’ is the first element of the ‘Making Tax Digital’ programme to be rolled out and this is due to be compulsory from April 2019 for all businesses who are required to be VAT registered due to the level of their business turnover.