Business Briefs · Want to be Self Employed?
Tax and Self Employment
Registering with HM Revenue & Customs
If you start working for yourself, you must register with HM Revenue & Customs within the first three full months of self employment. Otherwise you may be liable to financial penalty. You may register by telephone or by using form CWF1.
Once you become self-employed, the tax rules are quite 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.
What profits do HM Revenue & Customs tax?
The starting point for the calculation of taxable profits is your profit and loss account. In calculating taxable profits you are entitled to claim deductions from your business income in respect of any expenses incurred for the purposes of trade (with a few minor exceptions).
Tax is 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.
How is the tax collected?
Tax returns
Tax returns covering income for the year ending 5 April 2010 have to be submitted to HM Revenue & Customs by the 'filing date' which is 31 October 2010 for paper returns and 31 January 2011 for online returns. The return will include a self assessment of your liability to income tax and capital gains tax.
There are automatic penalties for late filing of tax returns.
Payment of tax
Payments on account of income tax and Class 4 NIC will be due on 31 January 2010 and 31 July 2010. These interim payments will be based on one half of the total liability (less any tax deducted at source) for 2008-09. You will have the right to reduce payments on account if you believe the income tax for 2009-10 will be lower.
The balance of income tax for 2009-10 is due on 31 January 2011 (along with the first interim payment for 2010-11 and any capital gains tax for 2009-10).
Interest and surcharges will be levied for late payment.
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 HM Revenue & Customs, and is not deductible from business profits.
