A self-employed person is taxed completely differently from an employee. Your income for tax purposes is the difference between your income from your work and your business expenses.
The sections below provide an introduction to accounts and tax returns for those in business.
For further information on tax returns, and paying tax see the section 'What happens if I work
for myself?' in How the tax system works.
The tax year ends on 5 April and many businesses choose to draw up accounts to either 5 April or
31 March. This makes your business year coincide with the tax year and so makes it
easier to understand what to put on your tax return. However, you do not have to draw up
your accounts to coincide with the tax year. You can choose any date. You are taxed on the
profit of the accounting year which ends in a particular tax year. For example, if you make up
accounts to 31 December 2008, these will give your taxable profit for the tax year 2008/09.
These accounts provide the figures which must be sent to HM Revenue and Customs on the self-assessment tax return. You do not have to send HM Revenue and Customs the
accounts themselves. You may wish to do so if they give more detailed information
about your business which would help HM Revenue and Customs to understand it.
Your annual accounts and other calculations in the self-assessment tax return will
determine how much tax you pay. The tax return must be submitted by 31 October
each year if you file a paper return and want HM Revenue and Customs to calculate your tax bill. 31 January is the filing date if you file online. Tax is payable on 31 January and 31 July each year,
and it is important to keep your estimated tax liability in reserve (preferably in another
bank or savings account) so that the tax bill does not come as a terrible shock.
The tax situation is more complicated when you start up in business, and
you could end up paying more than one year's tax on 31 January after the end of your
first business year. If you can afford it, you may wish to obtain some professional help in
dealing with your accounts.
In the first few years of a new business the way in which the profit from your accounts
is matched to a tax year is quite complicated. You may have to pay some tax based on
an estimate of your profits. This is more likely to happen if you delay preparing your
accounts, or if your first set of accounts covers more than 12 months.
Self-employed business people should also recognise that HM Revenue and Customs has
considerable powers to monitor their business activities.
For instance, HM Revenue and Customs can institute a self-assessment enquiry.
The system includes random checks as well as checks where there is a suspicion
that you have done something wrong. However, HM Revenue and Customs has the power to assess
back tax, interest and penalties if they find something wrong. Some people take out
insurance against the professional costs of dealing with such a tax investigation.
If you are registered for VAT, HM Revenue and Customs also have wide powers to investigate your business records, as well as the right to visit your business premises and look at your books.
It is important to inform HM Revenue and Customs when you become self-employed. You can be fined if you do not do this (see section on Setting up in Business).
See also the sections on National Insurance and VAT.
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