If you choose to go for the self employed or partnership route then things are a little more complex than for a company. Income from self employment is reported on the individuals personal tax return.
The tax year for individuals runs from 6 April one year to 5 April the next year. It is quite unusual for a business to have a year end which coincides with the tax year and so a system is required to cope with this.
Effectively the accounting period that ends in the tax year is the one taxed in that year. So if your year end is 30 September 2016 this accounting period would be taxed in the year 2016/2017 [6 April 2016 to 5 April 2017]
OK, that’s not too complex but what happens in the first year that you’re in business? Well the profits that you earned from the day to started to the end of the tax year are taxed in that year.
So if your first year end was 30 September 2016, then you would prepare accounts to 30 September 2016 and then apportion for the period 1 October 2015 to 5th April 2016 and this would be taxed in the tax year 2015/2016. In 2016/2017 you would be taxed on the year ended 30 September 2016.
The sharp ones will have notice that we’ve been taxed twice on the same profits, both in the apportioned period in 2015/2016 and the full year in 2016/2017. This is called overlap profit and this is deducted from your final year of profits when you cease self employment or change your year end.
It is important to remember this value for overlap profits so that it can be deducted in the future.
Having worked out how profits are taxed we need to look at the payment of income tax for self employed businesses.
For each tax year the taxpayer pays two payments on account and one balancing payment. The payments on account are due on 31 January in the tax year and 31 July following the tax year. The balancing payment is due 31 January after the tax year. So for 2016/2017 the payment dates are as follows
1st payment on account due 31 January 2016
2nd payment on account due 31 July 2016
Balancing payment due 31 January 2017
The payments on account are based on the previous tax payment and each is normally half of the previous amount of tax due. They can be reduced if a taxpayer thinks their tax bill will be lower for a particular year. Interest is payable if the payments are reduced in error.
No payments on account are due in the first year that a taxpayer prepares a tax return.
The most important thing that we ever tell our clients is to save for their tax. In the self employed circumstances its possible for nearly two years to go by and pay no tax on the profits earned. Then you end up paying 18 months worth of tax in one go. If you haven’t saved for this its going to be hard to pay. We suggest that clients work out approximately what their tax will be and save this on a regular basis.