When to pay tax when you go self-employed

When you first go self-employed, it's very important that you (or your accountant) tell HM Revenue & Customs that you’re running your own business; partly so that you’re paying tax on time and partly so that you pay the appropriate National Insurance contributions.

Anyone beginning self-employment must register to pay tax with HM Revenue & Customs within three months from the end of the month in which you went self-employed. Failure to meet this deadline can result in a £100 penalty.

There are two forms which you should complete for the taxman to prove self-employment. These are:

  1. 'CWF1 Notification of Self-Employment'; and
  2. 'CA5601 Application to Pay Class 2 Contributions by Direct Debit'.

Both of these forms can be obtained from any HM Revenue & Customs or from the HM Revenue & Customs website.

Do bear in mind that if your profits or share of profits for 2008/09 are below £4,825, you may claim exemption from paying Class 2 contributions. This is only sensible if you have other earnings on which you are paying contributions.More information on Class 2 contributions and exempt taxes can be found in our book Tax Answers at a Glance.

If you're worried about when you should be paying tax or how much you should be paying as you're self-employed, then you can choose an accountant to handle your accounts and to advise you about your tax liabilities.

When to pay tax

If you're self-employed, you normally pay tax in three annual instalments:

  1. By 31 January - the amount is normally half of last year's tax bill.
  2. By 31 July - the same amount as in 1.
  3. By the next 31 January - the amount due is calculated on the actual income returned for the tax year less the payments you have already made (as above).

Completing a tax return

When you're self-employed, either as a sole trader or in a partnership, you must complete a tax return annually. A tax return is used to work out how much tax and National Insurance contributions you have to pay. Instead of paying tax on your income, you pay tax on your business profits and like a company, you can deduct your business expenses from your income to work out how much taxable profit you have made.

Usually HM Revenue & Customs will send you a tax return automatically in April, but if they don't, it's still your responsibility to ask for one. If you want HM Revenue & Customs to work out your tax bill, you should fill in the return and send it in by 31 October (the final deadline for paper filing) or 30 December if you're filing online, but if you're happy to calculate the tax yourself, the final deadline for online filing is 31 January. If you don't pay tax by this deadline, you will be fined and you may also be charged additional penalties.

It's always easier to complete your tax returns if all your paperwork is in order. If you're self-employed or a sole trader, legally you must keep records of your income (and any capital gains) for at least five years and ten months after the end of the tax year.

Most traders leave this matter to their accountants. If you don't want to use the services of an accountant, contact your local tax office in good time for its free advice and they will help you to complete your tax return. You can also contact HM Revenue & Custom's Self-Assessment Helpline on 0845 900 0444.

More tips on raising finance, making a business plan, keeping accounts and saving tax can be found in our Self-Employment Kit. It also outlines your tax-deductible expenses and discusses, in detail, VAT registration.

Published on: June 2, 2008

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