Self Employed Tax - an Introduction
Setting up a new business? McDade Roberts accountants offer friendly, down to earth help. Below is a quick guide to what you need to be thinking about in terms of Tax but remember, we are only a phone call away if you want to arrange an initial free consultation to get you heading in the right direction.
Registering with HM Revenue & Customs
If you start working for yourself, you must register with HMRC by 5 October following the end of the tax year in which your self employment starts. Otherwise you may be liable to penalty based on the tax due to HMRC.
There are three ways that you can register:
Once you become self-employed, the tax rules are different from those that may have applied when you were an employee. Instead of tax and national insurance being deducted from your earnings at source, you must be prepared to receive a bill at some time in the future. This can be a nasty shock if you haven't put enough money aside.
We aim to give you as much warning as possible to the likely timing and amount of tax payments you will need to make so speaking to us in the early days is the best thing to do.
What Profits do HMRC Tax?
The starting point is your profit and loss account. When calculating taxable profits you are entitled to claim deductions from your business income. For example, any expenses incurred for the purposes of trade.
When you buy equipment for your business, you will be entitled to deduct the full cost, up to a maximum of £1 million per year. For most cars, you can deduct only a proportion of the cost for each year you own them and use them in the business.
Tax is then payable on the whole of the profits of a trade, and so payments for your own 'wages' (drawings) are not deductible. However, if your spouse works in the business, the wages are an allowable deduction, provided they are actually paid and are a reasonable reward for what is done. Confused? Don't worry, we can explain it all to you when we meet.
How Does HMRC Allocate Profit To Tax Years?
The aim of the system is that over the lifetime of your business the profits will be taxed in full, once, and once only. But to make the system fair, there are certain complications.
The general rule is that the tax for a particular tax year is based on the profits of the twelve months to your accounting date in that tax year. For example, the tax for 2019/20 could be based on accounts for a year ending on various dates ranging from 6 April 2019 to 5 April 2020. This demonstrates that you get more time for the tax to be worked out if your accounts end early in the tax year, which is why 30 April is such a popular year-end for the self-employed.
How Is Tax Collected For Self Employed?
Tax returns covering income for the year ending 5 April 2019 have to be submitted to HMRC by the 'filing date' which is 31 October 2019 for paper returns and 31 January 2020 for online returns.
Payment of Tax
Payments on account of income tax and Class 4 national insurance contributions (NICs) will be due on 31 January 2019 and 31 July 2019. These interim payments will be based on one half of the total liability (less any tax deducted at source) for 2017/18. You will have the right to reduce payments on account if you believe the income tax for 2018-19 will be lower.
The balance of income tax for 2018-19 is due on 31 January 2020 (along with the first payment on account for 2019-20 and any capital gains tax for 2018/19).
Interest and penalties will be levied for late payment so make sure you are up to date with the calendar.
In the first tax year of your business, the tax payable is based on the profit arising between the starting date and the following 5 April. This is taken as the appropriate fraction of the profit shown in your first set of accounts. At McDade Roberts we set things out simply so that you always know what you owe and when to take one headache away from setting up on your own.
Change of Accounting Date
If you decide to change your accounting date this will have an effect on when and how much tax is paid. Make sure you check with your accountant first.
If you decide to cease trading, this will also have an effect on tax. Again, we are always here to discuss business decisions that can affect your tax liabilities.
What About National Insurance?
Self-employed are subject to a two-tier system of national insurance contributions. Class 2 NICs are at a flat rate of £3.00 per week, if earnings exceed £6,365 per annum.
Profits between £8,632 and £50,000 are subject to Class 4 NICs at a rate of 9%. Any excess of profit above £50,000 is subject to Class 4 NICs at the rate of 2%, without any upper limit.
Save For Your Tax
It is essential that you make proper provision to ensure the availability of funds to pay income tax and Class 4 national insurance. Interest on unpaid tax is chargeable by HMRC, and is not deductible from business profits. Please call us if you would like further help or advice on this matter.
Cash Basis for Small Businesses
In order to try to simplify the calculation of taxable income for small businesses, HMRC introduced an optional alternative system for eligible unincorporated businesses. Such businesses may calculate taxable income figures on a simpler cash basis if this suits the business. A second measure allows all unincorporated businesses to choose to use flat rate expenses for particular items of business expenditure.
It is overwhelming at first getting your head around the tax implications of becoming self-employed but that is why we are here to help. Don't get stuck, just give us a call and claim your free initial consultation today.