Starting a Business

An Introduction to the tax systems for the self employed

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 you will have to cope with.

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 2016-17 could be based on accounts for a year ending on various dates ranging from 6th April 2016 to 5th April 2017. 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 30th April is such a popular year-end for self-employed people.

How is the tax collected?

Tax returns

Tax returns covering income for the year ending 5th April 2017 have to be submitted to HMRC by the ‘filing date’ which is 31 October 2017 for paper returns and 31 January 2018 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

In this example payments on account of income tax, Class 2 and Class 4 national insurance contributions (NICs) will be due on 31 January 2017 and 31 July 2017. These interim payments are based on one half of the total liability (less any tax deducted at source) for 2015-2016. You will have the right to reduce payments on account if you believe the income tax for 2016-17 will be lower.

The balance of income tax for 2016-17 is due 31 January 2018 (along with the first payment on account for 2017-18 and any capital gains tax for 2016-17).
Interest and penalties will be levied for late payment.

What about national insurance?

The self-employed are subject to a two-tier system of national insurance contributions (NICs). Class 2 NICs are at a flat rate of £2.85 per week, if earnings exceed £6,025 per annum.

Payment for self-employed Class 2 NICs are due on 31 January and 31 July (as part of the self-assessment tax bill). However, Class 2 NICs are due to be abolished from April 2018 and Class 4 NICs will be changed to give the tax payer rights to pensions and benefits.

Profits between £8,164 and £45,000 are subject to Class 4 NICs at a rate of 9%. Any excess of profit above £45,000 is subject to Class 4 NICs at the rate of 2% without any upper limit. Class 4 NICs are collected by HMRC and are payable at the same time as the instalments of income tax.

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.