How do I pay tax on self-employed income?
This page 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, unless you are entitled to trading allowance full relief. If this is the case you may not need to report this income to HMRC.
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 2021 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 currently being undertaken. 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
(paper returns only)
|Deadline for lodging return online|
|On or before 31 July||31 October||31 October||31 January|
|1 to 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|
⚠️ As part of the government’s support to business during the coronavirus (COVID 19) outbreak, the Self-employment Income Support Scheme (SEISS) was introduced to provide grants to some self-employed individuals. The grant calculation depends on information on 2018/19 tax returns and therefore HMRC announced that if outstanding 2018/19 tax returns were submitted by 23 April 2020, the individuals may still be eligible for a SEISS grant. However, this deadline relates purely to eligibility for SEISS grant payments and does NOT affect the normal filing deadline for self assessment tax returns.
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 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.
As part of the government’s support to business during the coronavirus (COVID 19) outbreak, the Self-employment Income Support Scheme (SEISS) was introduced to provide grants to some self-employed individuals. The grant calculation depends on information on 2018/19 tax returns and therefore HMRC announced that if outstanding 2018/19 tax returns were submitted by 23 April 2020, the individuals may still be eligible for a SEISS grant. However, this deadline relates purely to eligibility for SEISS grant payments and does NOT affect the normal filing deadline for self assessment tax returns.
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 HMRC do not provide an online partnership return. Therefore, if you cannot file the partnership return by other means (such as 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 0345 120 3779 (Monday-Friday 10 am to 4pm).
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 to make the amendments (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 2019/20 tax return you normally have until 31 January 2022 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 2019/20 until 12 December 2020, then you can amend it up until 11 March 2022.
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 a refund if it is too late to amend my tax return?.
GOV.UK explains how you can make an amendment to your tax return whether you have filed a paper tax return or an online tax return using HMRC’s online system or commercial software.
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.
You may already have had tax deducted from some income, for example you are registered under the Construction Industry Scheme (CIS) or you are employed and self-employed. In this situation you include all the income on the tax return, whether or not it has already been taxed, and also include the tax that has been deducted at source. However, do not include any tax paid as a payment on account. The tax calculation will then automatically take account of any tax paid at source (for example, through CIS or PAYE) so the final position shown by the calculation will be the amount that is left to be paid through Self Assessment or to be refunded. Any payments on account already made should then be compared to the final position shown by the calculation to see whether there is any further amount to pay (known as the balancing payment) or to be refunded.
Chloe is employed part-time and also runs her own business. During the 2019/20 tax year she earns £15,000 from her job and pays tax through PAYE of £500, she also earns profits of £4,000 from her self-employment. When Chloe completes her 2019/20 tax return she includes all her employment income and tax deducted through PAYE and her self-employment profits. Her tax calculation will look as follows (ignoring National Insurance contributions for this illustration):
|Total income received||£19,000|
|minus Personal Allowance||(£12,500)|
|Total income on which tax is due||£6,500|
|Income tax due at 20%||£1,300|
|minus tax deducted||(£500)|
|Total income tax due by 31 January 2021||£800|
Important – if Chloe had been paying tax through payments on account then these would not show on HMRC’s calculation (either on the SA302 calculation or the online system) and should be considered separately when working out what tax is still left to pay. We illustrate this below:
Assume that Chloe had higher profits in the 2018/19 tax year so was due to make payments on account totalling £1,200 for the 2019/20 tax year as follows:
- 31 January 2020 – £600
- 31 July 2020 – £600 (although this payment on account has been deferred until 31 January 2021 because of the coronavirus (COVID-19) outbreak (see below) Chloe decides to pay it in July 2020)
When Chloe submits her 2019/20 tax return online in November 2020 her total income tax due would still show as £800 even though she is actually due a refund of £400 (£600 +£600 less £800) as she has overpaid her tax through payments on account. Chloe will need to deduct her payments from the online calculation to work out she is due a refund. After the online tax return has been automatically processed Chloe should be able to see that she is due a refund in her HMRC personal tax account and claim this back from HMRC.
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 for a tax year under Self Assessment. 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 to which the tax bill relates
|50% of prior year liability (known as first payment on account)|
|31 July following the tax year to which the tax bill relates||50% of prior year liability (known as second payment on account)|
|31 January following the tax year to which it relates||balance of any tax due (known as balancing payment)
PLUS first payment on account for next tax year
However, following the coronavirus (COVID-19) outbreak the second payment on account for the 2019/20 tax year, due on 31 July 2020, was deferred until 31 January 2021. We cover this in more detail in our section below How are my tax payments affected by the coronavirus outbreak?
It is still possible to pay the second payment on account for the 2019/20 tax year by 31 July 2020 if you would like to, and this is illustrated in the example of Marcus below.
⚠️ Note: Class 2 NIC, Capital Gains Tax, and/or student loan repayments due are always paid as part of the balancing payment and are not included in payments on account.
Marcus has an income tax (including Class 4 NIC) liability of £2,500 for 2018/19 and he also has a Class 2 NIC liability of £153.40, Therefore his total payments for the 2018/19 tax year are £2,653.40. His income tax (including Class 4 NIC) liability for 2019/20 is £3,500, and his Class 2 NIC bill is £156. Marcus’s business was not affected by the Coronavirus outbreak and he would like to continue to pay his tax at the ‘usual’ dates and so decides to pay his second payment on account by 31 July 2020.
His payments for 2019/20 are as follows:
|31 January 2020||£1,250 (50% of £2,500)|
|31 July 2020||£1,250 (50% of £2,500)|
|31 January 2021||£2,906 which is £1,000 (balancing payment)
PLUS £1,750 (50% of £3,500)
PLUS £156 (Class 2 NIC)
You will see that in this case for Marcus there are two amounts being paid on 31 January– the balance of tax due for one year and a payment on account for the following year. Exceptionally, in January 2021 the payment due might consist of three amounts rather than the usual two amounts, due to the ‘deferral’ option available to the self-employed as part of the government’s support for businesses during the coronavirus outbreak. For more information see below How are my tax payments affected by the coronavirus outbreak?
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 2019/20 tax year this is due by 31 January 2021.
See our section When do I make Self Assessment payments and file my tax return? for more information.
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 if, for example, you are also employed as well as self-employed, through Pay As You Earn (PAYE).
Robert's income tax liability (excluding Class 2 NICs) for 2019/20 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 2020/21 (the year to 5 April 2021).
These payments on account are based on your total tax and National Insurance contributions 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. However, there is a change to the 31 July payment deadline for the 2019/20 tax year because of the coronavirus (COVID-19) outbreak, this affects payments due on 31 July 2020 (see the section below for more information).
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 for the previous year and the first payment on account for the current tax year), but you can pay both together as a single total. For payments due by 31 January 2021, see the section below as there may be three amounts to pay in certain circumstances.
Example: Robert continued
By 31 January 2021 Robert will need to pay his 2019/20 tax liability and his Class 2 NIC for 2019/20 and will also need to make a payment on account for the tax year 2020/21 (year ending 5 April 2021).
His 2020/21 payments on account will be based on half of his 2019/20 tax liability.
Robert will therefore need to make payments on account of £1,400 on 31 January 2021 and £1,400 on 31 July 2021.
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.
Example: Robert continued
Robert's income for 2020/21 is likely to be much lower than that for 2019/20, so he can claim to reduce his payments on account. Robert works out that he will only have a tax bill for 2020/21 of around £2,200. The reduction will be £600. He therefore claims to reduce each of his 2020/21 payments on account by £300.
On 8 February 2021 Robert realises that he has reduced his payments on account by too much. He thinks he will have a tax bill for the year 2020/21 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 2021 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 2021. He sends a cheque with his letter, which HMRC received on 12 February 2021.
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 2021. The interest will run from 1 February 2021 to 12 February 2021 – 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 can be refunded to you as long as it is at least 30 days until your next payment is due, or it can be held by HMRC and set against the next payment when it becomes due. If your next payment is due within 30 days, the refund will automatically 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 Class 4 NIC 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.
⚠️ Top Tip: It can be quite a shock to your cash flow when you first move to payments on account. It may help you to put aside 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 Self-employed: don't get caught out by payments on account under Self Assessment helpful. Amongst other things it contains suggestions on how much you might need to set aside for your first tax bill. However, this factsheet is particularly useful if you have NOT deferred your second payment on account for the 2019/20 tax year, due on 31 July 2020. If you have deferred this payment see the section below.
How are my tax payments affected by the coronavirus outbreak?
Many self-employed people have been affected by the coronavirus (COVID 19) outbreak. The government have introduced changes to the tax system to help people during this time. One change has been to defer the second payment on account for the 2019/20 tax year, due on 31 July 2020, to 31 January 2021.
This deferral is automatic, you do not have to make a claim or notify HMRC that you want to defer this tax payment. You will not be charged any late payment interest or late filing penalties if you defer payment from 31 July 2020 to 31 January 2021.
Alternatively, if you do want to make the second payment on account by the ‘usual’ deadline, 31 July 2020 then you can still do so, see the example of Marcus for further information.
This deferral of the second payment on account deadline to 31 January 2021 is only for payments relating to the 2019/20 tax year, due by 31 July 2020. For other tax years the payment deadline for the second payment on account will continue to be 31 July.
⚠️ The deferral of the second payment of account will ease the cashflow for many self-employed people whose income has fallen during the coronavirus outbreak, but it is important to realise that this payment will still need to be paid by 31 January 2021, along with potentially two other payments -any balancing payment for the 2019/20 tax year and the first payment of account due for the 2020/21 tax year. This is shown in the example below.
Callum is self-employed and usually comes within the payments on account regime, however, his business has been affected by the coronavirus outbreak. Based on his 2018/19 tax bill Callum should have paid payments on account for 2019/20 of £1,500 so £750 by 31 January 2020 and £750 by 31 July 2020. When Callum prepares his 2019/20 Self Assessment tax return he calculates that he owes £1,800 tax and National Insurance contributions. Callum decides to use the automatic deferral of his second payment on account which was due by 31 July 2020 but is now due by 31 January 2021. Callum’s payments will now be due as follows:
|31 January 2020||
£750 (50% of £1,500)
Callum paid this in January when he was still trading as usual)
|31 July 2020||£nil – payment on account automatically deferred until 31 January 2021. Callum does not need to notify HMRC that he is deferring his payment.|
|31 January 2021||
which is made up of:
£750 (50% of £1,500) – deferred second payment on account
£300 (balancing payment for the 2019/20 tax £1,800 less £1,500 payments on account)
£900 first payment on account for 2020/21
£156 Class 2 National Insurance contributions
It may be the case that the tax due by 31 January 2021 is a lot for Callum to afford, he should check that the first payment on account for 2020/21 is not too much based on his trading during that tax year and apply for a reduction to his payments on account if that is the case.
There is information in the section below if you are struggling to pay tax owed.
You will not automatically be issued with a payslip by HMRC in advance of the payment dates on 31 January and 31 July (but note that the 31 July 2020 payment is automatically deferred - see section above). 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 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 PAYE code number?
Provided the tax outstanding is less than £3,000 it may be collected via your Pay As You Earn (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 may 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's Payment Support Service 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 may 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 contact details and details of the information you will need when you call can be found on GOV.UK. More guidance on negotiating a time to pay arrangement with HMRC can be found on TaxAid’s website and on our page: Coronavirus: Self-employment and paying tax.
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 VAT is the first element of the programme to be rolled out and this was compulsory from April 2019 for all businesses who are required to be VAT registered due to the level of their business turnover (sales).
‘Making Tax Digital for Business’ is currently in the testing phase with pilots and trials being run. It is not due to become compulsory before 2021, and consequently many of the details of the new regime are not yet finalised. At the moment the proposals mean that businesses will be required 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 should 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.
|◀ Self Assessment payments and tax return filing|