There are always many things that need sorting out when you first become self-employed and besides the obvious need to start generating an income for yourself, you will need to make sure your sort out your tax situation.
When you take the path into self-employment there might be some business advice that you need from someone like Slater and Gordon and you will also need to know what taxes will need to be paid and when they are due.
Now that you work for yourself
Moving from a salaried position into self-employment will probably mean that you haven't had to think too much about tax and national Insurance before, as this will have been deducted at source by your employers.
The tax you will be required to pay as a self-employed person will be income tax and two different types of National Insurance contributions (NICs). Class 2 NICs is a small fixed amount that is set at weekly amount and there is also Class 4 NICs, which will be based on the level of business profits that you declare at your year end.
Tax payment due
The important dates for self-employed people are the 31st January and the 31st July of each year.
HMRC will request a payment on account which is based on estimated tax that you will expect to be due for the following year. When we first become self-employed and running your business, there will likely be a scenario where your first tax bill after the first year of trading could be at least double the amount you were expecting, so you need to budget for this, and remember that a further 50% of the amount will be due on the 31st July.
A good suggestion to cope with the tax bills is to aim to put aside about 25% of your gross earnings, which should mean that you should have enough in the bank to pay the tax bill when it comes in.
The first few years can be a bit challenging when getting to grips with the system and budgeting for payments due, but once you are familiar with the system and have an idea of how much tax you are likely to be paying, it is likely that you settle into this aspect of self-employment more easily.
Understanding self-employed income tax
As a self-employed person you will be expected pay income tax based on your business profits rather than your gross income.
In order to arrive at the correct taxable figure, you will need to calculate your total business income and then work out the total amount of allowable business expenses, which is then deducted from your income figure and provides you with the amount due.
You are also able to claim capital allowances and also deduct any losses that are carried over from previous years if relevant. Once you have included any capital allowances in your calculations and deducted this figure, you will arrive at your taxable income.
You will be sent a tax return once you have registered with HMRC and if your turnover is below £77,000, you might be able to fill in a shorter tax return, as your business affairs are expected to be less complicated.
By Grace Slater
Grace is a small business advisor. She loves sharing her entrepreneurial insights online. Look for her posts on many investing and business blogs.