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If you are self-employed and working as a sole trader, partnership or limited company, you have to do a self-assessment tax return. The purpose of this form is for HM Revenue and Customs (HMRC) to work out how much tax and Class 4 National Insurance (NI) contributions you need to pay.
Basically, instead of paying tax on your income, you pay tax on your business's profits. And like a company, you can deduct business expenses from your business income to work out how much taxable profit you have made.
It's your responsibility to return the correct details of income and expenditure, accurately and on time. This is easier to do if you have kept good, up-to-date records of all your income and spending.
But if you are not confident about keeping good records and filling in the forms, then get yourself a good accountant. They can work out cheaper than the cost for doing it yourself and getting it wrong!
What do you have to pay tax on?
In a nutshell, it's your business profits and other income. If you have more than one business you have to complete separate self-employment pages in the tax return for each one.
If you're self-employed, which includes sole traders and partners in a partnership, you pay tax on your business' profits or share of them.
The first step is to add up all your business income. Then you deduct all the ordinary business expenses that you are allowed to set against tax. These might include the cost of supplies, rent on business premises, business travel costs, administrative expenses such as postage, and the cost of any employees you have.
You can also take into account purchases of equipment and vehicles, though these are treated differently and the cost is usually spread over several years. Anyway, this all goes down on your tax return form.
Nice little earners
As well as your business income, you will be taxed on any other income. This could include any salary or wages you are paid as an employee of another business; interest and dividends from any savings and investments; rental income from property; and gains on disposals of assets.
So, your total business profit, plus any other income you might have, is taxable. But the amount of income and profits chargeable to tax will be reduced by any allowances you can claim. There is a range of benefits, so they're worth investigating.
Also worth knowing are the tax bands, which change slightly from year to year. Tax bands tell you the level of income you can earn before you hit the next threshold of tax.
Currently, the amount of income you can earn before income tax is applied is £5,435, which is termed a personal allowance. Between £0 and £2,230 tax is paid at 10%, taking this allowance into account. Between £2,231 and £34,600, the tax rate is 22%. If you earn more than £34,600, you will be taxed at 40% for any additional income.*
Tax returns
Tax returns can be filed by post or online, and the form itself has multiple sections, many of which may be irrelevant to you, so read it carefully.
The tax return form is automatically sent out after the end of the tax year, which is 5 April, and must be returned by 31 January the next year.
But you need to send it to the Inland Revenue by 30 September the same year if you want them to work out how much you have to pay by the 31 January payment deadline.
*Information correct as of March 2008.
Related information:
Finding a niche in the market - you may think people need your business, but don't rely on gut instincts - research is essential.
Putting a business plan together - it's important you read up on how to do this - any investment you hope to get could ride on it.
What business structure is best for you? - should you be a sole trader, 'ltd', 'plc' or a partnership? We explain the different options.
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