How do I pay tax on self-employed income?
This section looks out 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.
As well as maintaining any records you need to retain for other types of income, you need to keep some additional records for your business. You can keep your records on a computer but you should ensure that you can always access these records if, for example, you upgrade your computer or software.
It is very important you keep your personal records separate from those for your business. This is so that if HMRC ask to see your business records, they are completely separate from your personal records.
If you are in business as a self-employed sole trader or a partnership (including property letting businesses) you need to set up a system for keeping your records.
HMRC require you to:
- record all sales and other business receipts as they come in, and retain the records – for example, electronic sales records or till rolls
- keep back-up records, for example, invoices, bank statements and paying-in slips to show where the income came from
- record all purchases and other expenses as they arise and ensure, unless the amounts are very small, that you have, and retain, invoices for them
- keep a record of all purchases and sales of assets used in your business
- record all amounts taken out of the business bank account, or in cash, for your own or your family's personal use
- record all amounts paid into the business from personal funds, for example, the proceeds of a life assurance policy.
Which accounts books you need to keep depends mainly on the size of your business but you should at the very least have a cash book – this would include payments to and from your bank, cash receipts and payments and any amounts you take out of the business. You may also want to keep a separate record book for your day to day small cash transactions – a petty cash book.
Some specific examples of records you should keep include:
- If you use your own home for your business you need to allocate running costs between private and business use (unless you are using the simplified expenses flat rate).
- A record of all your own or your family's personal drawings from the business. This is money that your family or you take from the business bank account or petty cash etc for your own purposes.
- Details of any hire purchase or leasing arrangements taken out (including rent agreements)
- Details of any money or assets you introduce into your business
- Copies of business bank statements and building society passbooks/statements. If you do not have separate business and private accounts you will need to keep an accurate record of which expenses are business and which are private.
- Wages records where you have employees or if you have subcontractors you need to keep records to support any payments you make.
- An inventory of any stock on hand
- Unless you use your car or van specifically for the business you will need to keep a record of business use to include both running costs and fuel (unless you use the simplified expenses for motor expenses).
If you are self-employed and carrying on a business you need to keep your records for five years from 31 January following the tax year for which the tax return is made. So for example records relating to your self-employed income and expenses declared on the 2016/17 tax return must be kept until 31 January 2023 (ie 5 years from 31 January 2018, which is 31 January following the end of the 2016/17 tax year).
There are some situations where you will need to keep records for a different period of time.You can find out more about this in the section 'How long should I keep my business records?' and about penalties that can be charged for failing to keep records in our section 'What are the penalties for keeping inadequate business records'.
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 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. See our penalties page for more information.
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. 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 2016/17 self assessment tax return on 30 November 2017. 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 2018. 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.
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).
If therefore you need to amend your 2016/17 tax return you normally have until 31 January 2019 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 2016/17 until 12 December 2017, then you can amend it up until 11 March 2019.
When do I pay income tax on my self-employed profits?
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. You pay tax on your self-employed profits at the same time as you pay tax on all of your other income.
Generally speaking you pay your income tax in three instalments as follows:
|31 January in the tax year||50% of prior year liability (payment on account)|
|31 July following the tax year||50% of prior year liability (payment on account)|
|31 January following the tax year||balance of any tax due (balancing payment)
PLUS first payment on account for next tax year
You should note that any class 2 National Insurance and/or capital gains tax due is always paid as part of the balancing payment and does not interfere at all with payments on account.
Marcus has an income tax liability of £2,500 for 2016/17 and his liability for 2017/18 is £3,500.
He pays his tax for 2017/18 as follows:
|31 January 2018||£1,250 (50% of £2,500)|
|31 July 2018||£1,250 (50% of £2,500)|
|31 January 2019|| £1,000 (balancing payment)
PLUS £1,750 (50% of £3,500)
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.
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, 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.
What are payments on account?
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 tax bill was over £1,000, unless more than 80% of your previous year’s liability was covered by tax taken off at source. Tax will be taken at source for example if you are employed through Pay As Your Earn (PAYE).
Robert's tax liability for 2016/17 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 2017/18 (the year to 5 April 2018).
These payments on account are based on the total of your tax bill for the previous year and you will pay half of that amount on 31 January in 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 so you may have two amounts to pay (but you can pay both together as a single total).
On 31 January 2018 Robert will need to pay his 2016/17 tax liability and will also need to make a payment on account for the tax year 2017/18 (year ended 5 April 2018).
His payment on account will be based on half of his 2016/17 tax liability.
Robert will therefore need to make payments on account of £1,400 on 31 January 2018 and £1,400 on 31 July 2018.
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 due.
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 2017/18 is likely to be much lower than that for 2016/17, so he can claim to reduce his payments on account. Robert works out that he will only have a tax bill for 2017/18 of around £2,200. The reduction will be £600. He therefore claims to reduce each of his 2017/18 payments on account by £300.
On 8 February 2018 Robert realises that he has reduced his payments on account by too much. He thinks he will have a tax bill for the year 2017/18 of nearer £2,500 and not £2,200.
Robert writes to HMRC to let them know he will need to pay more tax on each instalment. He has already paid the 31 January 2018 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 2018. He sends a cheque with his letter, which HMRC received on 12 February 2018.
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 2018. The interest will run from 1 February 2018 to 12 February 2018 - 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 bill was above £1,000 and only then if less than 80% of your tax bill was collected by deductions at source.
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 raised 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.
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' interesting. 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.
You should note that making payment by credit card is likely to incur additional costs. 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?
As long as the tax outstanding is less than £3,000 it may be collected via your 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 31 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.