How To Pay Income Tax If You're Self-Employed

Income tax is paid in different ways depending on your employment status and your income. A multitude of systems can be confusing to lot of people, especially for those who are self-employed. Self-employed people do not have their income tax automatically deducted from their pay packet because they work for themselves, which means they must calculate and file their tax return independently.

What Is Income Tax?

Income tax is a set slice of your overall income (earned and non-earned) taken by Inland Revenue, the government department responsible for it. It works ‘progressively’, which means that the higher amount of money you earn, the more you will be taxed. The lowest rate is approximately 10% and the highest is 40% (2009/10). Certain people are exempt from income tax, such as those in full-time education and those who earn below a particular threshold.

Income Tax and Self-Employment

If you work for a company that you do not own, it is very likely that you will pay your income tax every month through a system called Pay As You Earn (PAYE), where your employer will deduct the tax from your wages. If you are self-employed you must complete a Self Assessment tax return.

You should notify Her Majesty’s Revenue and Customs immediately to let them know you are working for yourself (you can phone them on 0845 915 4515 or use form CWF1). Once you are registered, you are officially a Self Assessed Tax Payer. It is your responsibility now to tell the government what income you receive (including capital gains such as the sale of property).

Self Assessment tax returns are usually sent out every April and there are penalties for completing them late. If you have not received one (or a notice telling you to file for it online) contact the Tax Office immediately. Some people will be eligible for certain reliefs or benefits so can apply for a Self Assessment tax return at any time and a form will be sent to you. When filling out the form you must notify the Inland Revenue of every income that you have received that year (they will then work out your tax bill and National Insurance Contributions for you), although it is helpful to have some idea of what you need to pay throughout the year so you can put money aside. The core Self Assessment forms are SA100 and SA101, but you will probably also receive supplementary pages depending on your status.

The most important thing to remember is to keep records of all of your financial transactions; it is a legal requirement and makes filing for a tax return much easier.