Every self-employed person must complete a self assessment tax return. It's used to work out how much tax and Class 4 National Insurance contributions you must pay.
Instead of paying tax on your income, you pay tax on your business profits. Like a company, you can deduct business expenses from your business income to work out how much taxable profit you have made.
It's your responsibility to return the correct details of income and expenditure. It's easier to do this if you have kept good, up-to-date records. And you are responsible for completing an accurate self assessment return on time and for paying any tax and National Insurance contributions you owe.
This guide helps you to work out whether you're self-employed, what income tax and National Insurance you should be paying and how to pay it.
Your employment status affects the tax and National Insurance you have to pay, so it's important you are sure that you are classed as self-employed.
If you can answer "Yes" to the following questions, it will usually mean you are self-employed.
- Do you have the final say in how the business is run?
- Do you risk your own money in the business?
- Are you responsible for meeting the losses as well as taking the profits?
- Do you provide the main items of equipment you need to do your job, not just the small tools many employees provide for themselves?
- Are you free to hire other people on your own terms to do the work you have taken on? Do you pay them out of your own pocket?
- Do you have to correct unsatisfactory work in your own time and at your own expense?
It's possible to be self-employed for some of your work, but an employee of another business as well. There are special rules if you work through an agency or are a company director, the secretary of a club or the holder of any other office. Under these circumstances you will normally have to pay tax and National Insurance contributions as if you are an employee.
You have to pay tax on business profits and other income. If you have more than one business you have to complete separate self-employment pages in the tax return for each one.
Business profits
If you're self-employed, which includes sole traders and partners in a partnership, you pay tax on your business' profits or share of them.
The first step is to add up all your business income. Then deduct all the ordinary business expenses that you are allowed to set against tax. For example:
- the cost of supplies
- rent on business premises
- business travel costs
- administrative expenses such as postage
- the cost of any employees you have
Take into account purchases of equipment and vehicles. These are treated differently. Instead of deducting the whole cost straight away, the cost is usually spread over several years. For more information, see our guide on
capital allowances.
Other income
As well as your business income, you will be taxed on any other income. For example:
- any salary or wages you are paid as an employee of another business
- interest and dividends from any savings and investments
- rental income from property
- gains on disposals of assets
Your total business profit plus any other income is taxable. However the amount of income and profits chargeable to tax will be reduced by any allowances you can claim. Find tax
rate and allowances on our site.
By law, you must keep business records for at least five years and ten months after the end of the tax year the records relate to. You can be charged up to £3,000 for each failure to maintain or retain adequate records. You need to keep your business records and personal records separate. Most businesses find that it helps to have a separate business bank account.
Your basic records will normally include:
- a record of all your sales, with copies of any invoices you have issued
- a record of all your business purchases and expenses
- invoices for all your business purchases and expenses, unless they are for very small amounts
- details of any amounts you personally pay into or take from the business
- copies of business bank statements
You use these records to create a profit and loss account - which shows the sales revenue you have received and the costs you have paid. Your business profits are taxable.
It's helpful to keep a separate record of purchases and sales of assets that you use in the business, such as equipment. These need to be treated differently in your tax return. You can claim capital allowances for assets, which means that rather than claiming the whole cost at the time you buy, you reclaim the cost over time.
