Getting started with Income Tax and National Insurance
If you are self-employed, you will need to pay Income Tax and National Insurance on what is known as taxable income.
Taxable income is mainly the profits you make from working for yourself. This means you pay tax not on the entire income you make in your business but the difference between the income you make and the amount you spend on expenses for running the business.
You will pay Income Tax and National Insurance throughout the HMRC Self-Assessment system and will need to complete a tax return following the end of every tax year.
As soon as you start in business you will need to register with HMRC.
Once you have registered, HMRC will send you a Self-Assessment Unique Taxpayer Reference which you will need to quote whenever you contact them.
The deadline by which a tax return is due to be completed and sent to HMRC is dependent upon whether you choose to send your tax return in on paper on online. Paper returns must reach HMRC by 31st October and online returns by 31st January following the end of the tax year to which the tax return relates.
There are late filing penalties if you don’t send in your tax return on time.
There are also deadlines for paying the tax you own. If you don’t pay on time, you may have to pay interest and late payment penalties.
You must maintain adequate records when you are self-employed such as retaining invoices you have issued and keeping receipts for any purchases you have made for the business.
Records should be organised in separate accounting periods. The last date of an accounting period is known as your accounting date. This is the date that you will close your accounts each year. Your business accounts will be prepared from the details recorded during your accounting period.
Whichever accounting period you choose, having a good record keeping system in place will make things easier when you come to complete your Self-Assessment tax return.
When doing your tax return, you can deduct your business expenses from your income to reduce the amount of tax you have to pay.