When you are self-employed you're responsible for paying your own tax and National Insurance Contributions (NICs). It's not like working for someone else when it's up to your employer to deduct tax and NICs and pay the money to HM Revenue & Customs (HMRC) each week or month.
As a self-employed person you are likely to have to pay:
- income tax
- Class 2 NICs
- Class 4 NICs
Income tax and Class 4 NICs are worked out as a percentage of your profits. Your profits can only be worked out when accounts covering your first year's trading have been prepared. Because of that, it's impossible to say exactly how much will be payable until after the end of your first year in business.
You pay any tax and Class 4 NICs due on your first year's profits through Self Assessment after the end of that year. Payment is due by 31 January following the end of the tax year in which you started your business, when you will also make your first 'payment on account' towards the current tax year's tax (a tax year runs from 6 April to the following 5 April). After that, a second payment on account is due by 31 July. Then the next January you will make any balancing payment due for the last tax year (if your payments on account have not covered the total amount due), along with your first payment on account for the tax year you are now in. It's best to keep this payment cycle in mind and to set aside money regularly so that you can pay the tax and NICs when they are due.
Class 2 NICs are paid at a flat rate. They pay for your state pension and other benefits. If your profits are above the 'small earnings exemption threshold' then you'll normally pay Class 2 NICs through Self Assessment. However, you can opt to pay monthly in advance by setting up a 'budget payment plan' so long as your tax payments are up to date. If your profits are below the exemption threshold you can pay Class 2 NICs voluntarily to preserve your state pension.
There is a special scheme which applies to sub-contractors in the construction industry. If you are a sub-contractor and you sub-contract to a qualifying main contractor, the contractor will deduct tax at a flat rate when paying you (unless you're registered to receive gross payments). The rate at which they deduct tax depends on whether or not you're registered with HMRC - they use a higher rate if you're not registered. When your accounts are prepared, your correct tax liability will be worked out and you will either have to pay more or, more usually, some of the flat rate tax which was deducted will be repaid to you.
If you only work for private customers and small businesses which aren't in the construction industry this won't apply to you. If you want to find out more about how sub-contractors pay tax, ask your local HMRC office for details. Further information is also available on the HMRC section of the Gov.uk website.
Businesses that are having trouble making their tax and NICs payments, or are worried that future payments will cause them problems, can ask for help from HMRC. If your business needs this financial assistance to tide it over, HMRC will look at your situation and discuss temporary options that could help out. These could include letting you make payments over a longer period and waiving late payment surcharges. To discuss payment problems with HMRC you can call the Business Payment Support Service Helpline on 0300 200 3835 if you think you will be unable to pay before your deadline. If you have missed the deadline and HMRC has written to you, contact the office that wrote to you. If you have missed the Self Assessment deadline you can also call the Self Assessment Payment Helpline on 0300 200 3822.
Ask your accountant to use your cash flow projections to estimate how much you will have to pay and then to adjust the estimate after six months when you know how the business is doing. You could save the money in a business savings account.
The first thing you should do when you have decided to start your business is to get the HMRC leaflet SE1 Thinking of working for yourself? You can download this leaflet from the Gov.uk website. You must also notify HMRC that you have started in business as soon as possible - you can do this online.