Working out profits and paying tax

Self-employed

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. 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.

Example:

Johanan starts in business on 30 June 2013. His first tax return will be due for the year to 5 April 2014. Any tax due will be payable by 31 January 2015. The bill will cover tax due on profits from 30 June 2013 to 5 April 2014, plus 6 months in respect of the tax year to 5 April 2015.

After the first year in business, you will normally have two tax bills each year – due 31 January and 31 July in each year. (If your annual tax bill is £1,000 or less, you will have only one bill, due 31 January each year). These two tax bills will include ‘payments on account’.

Example:

Aaron prepares accounts to 31 March each year. His total tax bill for the tax year to 5 April 2013 (based on his accounts to 31 March 2013) was £3,000. He submitted his return for 2012/13 in June 2013.

He submits his tax return for the year to 5 April 2014 in September 2014. This shows tax due of £3,500, and is based on his accounts to 31 March 2014.

Aaron’s tax bills for the tax year to 5 April 2014 will be:

1) 31 January 2014 – First payment on account for the tax year to 5 April 2014 – £1,500. This is simply half his tax bill for the previous tax year (ie tax year to 5 April 2013). [If his payments on account for 201213 did not cover all the tax due for that year, he will also have to pay the additional tax due for 2012/13  along with his 2013/14 first payment on account.]

2) 31 July 2014 – second payment on account for the tax year to 5 April 2014 – £1,500. Again, this is simply half his tax bill for the previous tax year

3) 31 January 2015 – The adjustment due, based on Aaron’s tax return showing the actual amount owing for the year to 5 April 2014 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 2015]. He will also need to pay the first payment on account for the year to 5 April 2015. This is based on half of his tax bill for the year to 5 April 2014 of £3,500, so £1,750. Aaron’s total tax bill for 31 January 2015 is therefore £2,250 (= £500 for the year to 5 April 2014 and £1,750 on account for the year to 5 April 2015).

TaxAid Tip

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.

Glossary

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

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