Working out profits and paying tax
Self-employed - running a business and paying tax
Working out your profits
When you have all the information about your income and expenses you can prepare you business accounts and work out your profits.
If you have an accountant, your accountant will prepare your business accounts and make any adjustments to the business accounts to comply with the tax rules.
If you do not have an accountant, you will need to work out your business income and expenses and then put these figures onto your tax return. You will normally need to group your expenses together before putting them on the tax return. Most small businesses will need to show only three figures on the tax return – total business income, total business expenses, and profit (or loss). You will need to show any adjustments to your figures, for example for private use of business goods or services, or capital expenditure, in the appropriate boxes.
Paying your tax
For the first year you are self-employed, there could be a long delay before you pay any tax, but, when it arrives, the bill is likely to be large and could cover 18 months’ profits.
John starts in business on 30 June 2015. His first tax return will be due for the year to 5 April 2016. Any tax due will be payable by 31 January 2017. The bill will cover tax due on profits from 30 June 2015 to 5 April 2016, plus 6 months in respect of the tax year to 5 April 2017.
After the first year in business, you will normally have two tax bills each year – due 31 January and 31 July in each year. These two tax bills will include ‘payments on account’. (If your annual tax bill is £1,000 or less, you will have only one bill, due 31 January each year).
Aaron prepares accounts to 31 March each year. His total tax bill for the tax year to 5 April 2015 (based on his accounts to 31 March 2015) was £3,000. He submitted his return for 2014/15 in June 2015.
He submits his tax return for the year to 5 April 2016 in September 2016. This shows tax due of £3,500, and is based on his accounts to 31 March 2016.
Aaron’s tax bills for the tax year to 5 April 2016 will be:
1) 31 January 2016 – First payment on account for the tax year to 5 April 2016 – £1,500. This is simply half his tax bill for the previous tax year (ie tax year to 5 April 2015). [If his payments on account for 2014-15 did not cover all the tax due for that year, he will also have to pay the additional tax due for 2014/15 along with his 2015/16 first payment on account.]
2) 31 July 2016 – second payment on account for the tax year to 5 April 2016 – £1,500. Again, this is simply half his tax bill for the previous tax year
3) 31 January 2017 – The adjustment due, based on Aaron’s tax return showing the actual amount owing for the year to 5 April 2016 is £500.
[He has paid 2 x £1,500 = £3,000 already, but his tax return showed £3,500 due in total, leaving an additional £500 due 31 January 2017].
He will also need to pay the first payment on account for the year to 5 April 2017. This is based on half of his tax bill for the year to 5 April 2016 of £3,500, so £1,750. Aaron’s total tax bill for 31 January 2017 is therefore £2,250 (= £500 for the year to 5 April 2016 and £1,750 on account for the year to 5 April 2017).
The Self Assessment Tax Return form will show you how to add up the numbers. If you use self-assessment on-line, this will be done for you automatically – so long as you put the information from your business accounts into the right boxes.
- payments on account
- provisional amounts of tax payable until your final liability for the year is worked out
- payment on account
- provisional amount of tax payable until your final liability for the year is worked out