All About Income Tax

When you’re running your own business and are self-employed, you can’t really afford to be ignorant about income tax. Income tax is the tax that all earners in the UK have to pay on the income they earn. It only kicks in after a certain amount is earned (currently £6,035 for the tax year 2008-2009) and not all income is taxable (e.g. some benefits, tax exempt accounts and premium bond wins). Examples of taxable income are:

• Money you earn from self-employment or employment.
• State pensions.
• Interest on savings.
• Share dividends.
• Rental income.
• Money paid to you from a trust.

Determining How Much Income Tax To Pay

As a self-employed person and business owner, it’s up to you to complete an annual self-assessment tax return to let the taxman know about all that you’ve earned in the last year. Once your tax return is completed, it’s sent to HM Revenue and Customs (HMRC) and the amount of income tax and Class 4 National Insurance contributions you need to pay is worked out.

In order to complete the self-assessment tax form, you need to keep accurate records throughout the year of all your incomings and outgoings. This is one very good reason why it’s important to be organised and develop an efficient filing system for all your receipts, as well as record details of expenditure and everything you’ve earned as you go along. If you’re not quite so organised, you could find yourself with a pile of receipts to sort out or months worth of records to input at the end of the year, which isn’t fun.

Completing the tax return is relatively straightforward, especially if your business is only small and uncomplicated, but not everyone finds it an enjoyable task. If you’re not keen on doing it yourself, hire an accountant to do it for you, as this can relieve some of the stress often involved with filling in the form. An accountant will appreciate receiving well-organised and accurate records, so remember to retain everything efficiently so they can do their job well.

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Paying Income Tax

When the tax return has been submitted to the HMRC, they’ll work out how much income tax you need to pay for your business earnings in the year concerned. They’ll also make a prediction, based on your current earnings, about how much tax you’re likely to need to pay in the following year.

This means that in January each year you’ll need to pay a chunk of your tax for the year just gone, plus more on account for the next year; subsequent payments are due in July each year. This can come as a shock to some small businesses, especially if you’ve not put any money aside to help pay for this. If the HMRC have the prediction for your next year’s earnings and tax wrong, then they’ll either refund the difference at a later stage or you’ll have to pay the extra at a later date.

One way of handling paying your tax and ensuring you’ve always got enough funds at the ready is to get into the habit of regularly putting aside a proportion of your earnings. If you put one third, for example, then you’ll be fully covered. The money you’re saving can go into a high interest account, where you’ll earn a good rate of interest on it. Do remember to pay your tax on time – there are a variety of methods you can use these days to make it quick and easy – otherwise you could be in line for a late payment fine.

The Next Step

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