Self-assessment: What you need to know
An introduction to self assessment and tax returns
If you’re self-employed you will need to register with the Inland Revenue. You will then have to pay income tax based on your profitable income from the previous year. You will also receive a Schedule D coding from the taxman which allows you to offset business expenses against tax.
You will pay tax in two lump sums on January 31 and July 31. Self-employed people pay tax on a current year basis.
Using the previous year as a guide, you pay a first instalment on January 31 and the second on July 31. If you earn more than the previous year, you will have to pay the excess on the following January 31. Most people face a bigger tax bill each January but your accountant should be able to tell you well in advance what this bill is likely to be and hopefully give you enough time to save.
If, in contrast, you are doing less work in the current year and expect your tax bill to be less than previously, you can appeal to the taxman to reduce the payments – as long as you do it before the January 31 deadline.
With the arrival of self-assessment, the taxman has toughened up the rules on payment. Non-payment or late payment can result in an automatic fixed panalty of £100, with larger penalties and interest charges for the worst offenders.
There are also reports that late payment may trigger a full investigation by the tax office. Even if you do pay the correct amount of tax, these investigations are something to be avoided purely because of the paperwork involved – and the accountant’s bill that you may have to run up.
We, of course, do not just pay income tax and there are several other tax and business rates you should be aware of:
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Everyone, except the very lowest wage earners, has to pay National Insurance Contributions. As a self-employed person, you can pay a basic amount quarterly or monthly by direct debit (Class 2 contributions). You will also have to pay a top-up amount, depending on your income, along with your tax bill (Class 4 contributions). These are worked out as a percentage of your annual profits between lower and upper limits, which are set each year in the Budget.
For the year 2013-14 as a self-employed person, you would have generally had to pay a Class 4 rate of 9% on profits of between £7,755 to £41,450, and a further 2% on profits over that amount. For 2014-2015, you will have to pay a Class 4 rate of between £7,956 to £41,865, and additional 2% on profits over this upper limit.
If the company owns your car, you will also face taxation on the car benefits. These vary according to engine size, fuel type and business mileage annually.
If you work from home but operate as a company, you will also face tax on some employee benefits. Working from home, this list is most likely to include such benefits as a cheap loan from the company or relocation expenses if you move your office (and home).
This is something to watch out for if you use a part of your property solely for business use, e.g. a garage that becomes an office. When you sell the property, there could be a capital gain on that section of the sale which could be taxable. It depends on the level of profit for that element, how long it has been an asset etc.
Most savings accounts are taxed at source. There are a few exceptions which are usually established as the account is opened – if you are over 65 or if the account holder is a minor. But the tax office will still want to know about all these interest earnings, likewise with any profits made from share dealings. Again keep records of everything and remember to include it all on the tax return.