Tax, made easy to read

Self Assessment is the system HMRC uses to collect income tax from people whose tax is not taken automatically through an employer. If you are employed, your tax is usually taken off your wages before you are paid, so you do not need to do anything. If you earn money in other ways, HMRC needs you to tell them about it once a year on a tax return.

You usually need to file a return if you were self employed and earned more than £1,000, if you rented out a property, if you were a company director taking dividends, if you earned over £50,000 and you or your partner claimed Child Benefit, or if you had other untaxed income such as savings, investments or money from abroad.

The return adds up everything you earned, takes off anything you are allowed to claim, and works out the tax due. If you are not sure whether you need to file one, it is worth checking early, because registering late is one of the most common reasons people end up with a penalty.

There are a few key dates each year. If you are filing for the first time you need to register with HMRC by 5 October after the end of the tax year. A paper return must be in by 31 October. An online return, and any tax you owe, must be in by 31 January.

If you miss the filing deadline you get an automatic £100 penalty straight away, even if you owe no tax. After 3 months the daily penalties start, and the longer it is left the more it grows. Paying late adds interest on top, plus further charges once a bill is 30 days overdue.

The simplest way to avoid all of this is to get your figures ready early. There is nothing to gain by waiting, because filing early does not mean paying early. You can file in the spring and still pay in January.

When you are self employed you only pay tax on your profit, which is your income minus your business costs. So claiming every cost you are genuinely allowed to claim means a lower tax bill. The rule is that the cost must be wholly for the business.

Common things you can claim include stock and materials, tools and equipment, business travel and mileage, a share of your phone and internet, accountancy fees, advertising, insurance, and the cost of running a home office. If you work from home you can either claim a flat monthly amount based on your hours, or work out the actual share of your bills.

Some costs are partly personal and partly business, such as a car or a phone used for both. In those cases you claim only the business share. Keeping receipts and a simple record as you go makes this far easier than trying to remember it all at the year end.

The trading allowance lets you earn up to £1,000 a year from self employment or a side hustle without paying any tax on it, and often without needing to tell HMRC at all. It is handy for small bits of casual income, such as selling online, a weekend hobby that brings in a little money, or odd freelance jobs.

If your income from these activities is under £1,000 in the year, you usually have nothing to report. If it is over £1,000, you do need to register and file a return. At that point you can choose to either deduct your actual expenses, or simply knock off the £1,000 allowance instead, whichever leaves you better off.

There is a similar £1,000 allowance for small amounts of property income, which works in the same way.

Payments on account are advance payments towards your next tax bill. They catch a lot of people out, because the first time you owe tax through Self Assessment you can end up paying more than you expected.

Here is how it works. If your tax bill is more than £1,000, HMRC asks you to pay this year's bill in full, plus half of it again as an advance towards next year. Then in July you pay the other half. So your January bill can feel like one and a half times the tax you actually owed for the year.

The good news is that you are not paying extra overall, you are just paying earlier. Those advance payments are then taken off next year's bill. If you know your income is going to fall, it is sometimes possible to ask HMRC to reduce the payments on account so you are not paying more upfront than you need to.

Being a sole trader is the simplest way to work for yourself. You and the business are the same thing in the eyes of the law, the paperwork is light, and you just report your profit on a Self Assessment return. The downside is that you are personally responsible for any debts the business runs up.

A limited company is a separate legal thing from you. It can make your business look more established, it protects your personal money if things go wrong, and once profits reach a certain level it can be more tax efficient. The trade off is more admin, with company accounts, a corporation tax return and filings at Companies House.

There is no single right answer. As a rough guide, many people start as a sole trader and look at switching to a company once profits are comfortably into the tens of thousands, because that is often where the tax savings start to outweigh the extra work. It is well worth a quick chat before you decide, because the best choice depends on your plans and your numbers.

If you run a limited company you have more reporting to do than a sole trader, but it is all very manageable once you know what is needed. There are really two main jobs each year.

First, you prepare your annual accounts, which are a summary of how the company did over the year. A version of these goes to Companies House, where some of the information is public. Second, you file a company tax return, known as the CT600, which goes to HMRC and works out the corporation tax due on your profit.

On top of that, the company has a confirmation statement to file each year, which simply confirms the basic details such as the directors and shareholders are still correct. The deadlines are tied to your company's own year end, so they are different for every business, which is exactly the sort of thing we keep track of for you.

Corporation tax is the tax a limited company pays on its profit. Profit here means what is left after you take the company's income and subtract its allowable costs, including your own salary if you take one.

The rate depends on how much profit the company makes. Profits up to £50,000 are taxed at the small profits rate of 19%. Profits above £250,000 are taxed at the main rate of 25%. In between those two figures there is a sliding scale called marginal relief, which gives an effective rate that climbs gradually from 19% towards 25%.

Corporation tax is due 9 months and 1 day after your company year end, which is actually before the deadline to file the return itself. That timing surprises people, so it is worth setting the money aside through the year rather than scrambling at the end.

When you own a limited company, the money in the business bank account is not automatically yours to spend. You take it out in one of two main ways, and most directors use a mix of both.

A salary is paid through the company payroll. A modest salary is tax efficient because it counts as a cost for the company, which lowers its corporation tax, and a small salary keeps you building up your state pension record without triggering much tax.

A dividend is a share of the company's profit paid to you as a shareholder. Dividends have their own tax rates, which are lower than the rates on salary, and the first £500 each year is tax free. The catch is that dividends can only be paid out of profit after corporation tax. Getting the balance of salary and dividends right is one of the simplest ways to keep your overall tax bill down, and it is something we set up for our company clients.

VAT is a tax added to most goods and services. You must register for VAT once your taxable turnover goes over £90,000 in any rolling 12 month period. Note that this is about your sales, not your profit, and it is a moving 12 month window rather than your accounting year.

You also have to register if you expect to go over that figure in the next 30 days alone. Once registered, you add VAT to your prices, hand that VAT to HMRC, and you can reclaim the VAT you pay on your own business costs.

You can also choose to register voluntarily before you hit the threshold. That can be worth doing if most of your customers are themselves VAT registered, or if you buy a lot of VAT on equipment and stock that you would like to reclaim. It is a balance worth thinking through, because registering also means adding 20% to prices for any customers who cannot reclaim it.

Once you are VAT registered, you charge VAT on your sales, usually at the standard rate of 20%. That VAT is not yours to keep, you are simply collecting it for HMRC. At the same time, you can reclaim the VAT you are charged on your own business purchases.

Every quarter you add up the VAT you charged customers and subtract the VAT you paid on costs. If you charged more than you paid, you send the difference to HMRC. If you paid more than you charged, for example after buying expensive equipment, HMRC pays you back.

There are also simpler schemes for smaller businesses, such as the Flat Rate Scheme, where you pay a fixed percentage of your turnover rather than tracking every transaction, and cash accounting, where you only account for VAT once you have actually been paid. The right scheme depends on your business, and choosing well can save both money and time.

Making Tax Digital, or MTD, is HMRC's plan to move tax record keeping online. The idea is that instead of one big return once a year worked out from a shoebox of receipts, you keep digital records and send HMRC updates using approved software.

It is already in place for VAT, so every VAT registered business now needs to keep digital records and file VAT returns through compatible software rather than typing figures into the HMRC website by hand.

The next step is MTD for Income Tax. From April 2026, sole traders and landlords with income over £50,000 will need to keep digital records and send HMRC a summary every quarter, with a final declaration after the year end. Those over £30,000 follow a year later. It sounds like more work, but with the right software set up properly it usually means less last minute panic, not more.

Bookkeeping just means keeping a tidy record of the money coming into and going out of your business. It is not the most exciting part of running a business, but it is one of the most valuable, because nearly everything else depends on it.

When your records are up to date you claim every expense you are entitled to, so you never overpay tax simply because a receipt went missing. You can also see at a glance how the business is really doing, which helps you make better decisions about pricing, spending and saving for your tax bill.

Modern cloud software makes this far easier than it used to be. It can pull in your bank transactions automatically, let you snap a photo of a receipt on your phone, and keep everything in one place ready for your accounts. Good books also make your year end quicker and cheaper, because there is less tidying up to do.

If you take on staff, or pay yourself a salary through your own company, you run a payroll. PAYE, which stands for Pay As You Earn, is the system for taking income tax and National Insurance off wages before your people are paid.

Each time you pay someone, you work out the tax and National Insurance due, give the employee a payslip, and report the figures to HMRC on or before pay day. This reporting is called RTI, or Real Time Information. You then pay HMRC what is owed, usually monthly.

As an employer you also pay employer's National Insurance on top of wages, and you may need to enrol staff into a workplace pension and pay into it. It is a lot of moving parts, and the deadlines are strict, which is why many small businesses simply hand the whole thing over rather than risk a slip.

If you rent out a property, the profit you make is taxable and usually needs to go on a Self Assessment return. Profit means the rent you receive minus the costs of running the let, such as letting agent fees, insurance, repairs, ground rent and maintenance.

One area that catches landlords out is mortgage interest. You can no longer simply deduct all your mortgage interest from your rental income. Instead you get a tax reduction worth 20% of the interest, which makes a real difference for higher rate taxpayers, so it is worth understanding before you assume your bill.

There is also a £1,000 property allowance for small amounts of rental income, and special rules for furnished holiday lets and for selling a property, where capital gains tax can come into play. The rules have changed a lot in recent years, so getting current advice is sensible.

Most people can earn a certain amount each year before they pay any income tax. This is the personal allowance, currently £12,570. You only start paying tax on income above that.

After the allowance, income is taxed in bands. The basic rate of 20% applies up to £50,270. The higher rate of 40% applies from there up to £125,140. Above that, the additional rate of 45% kicks in. Only the income that falls within each band is taxed at that band's rate, so moving into a higher band does not increase the tax on your earlier income.

One thing to watch is that once your income passes £100,000, your personal allowance is gradually taken away, which creates a band where the effective rate is unusually high. These figures are for England, Wales and Northern Ireland, as Scotland sets its own income tax bands.

National Insurance is a second tax on earnings that sits alongside income tax. It is what builds up your entitlement to the state pension and certain benefits, so it is not simply money lost.

Employees pay Class 1 National Insurance, which comes off their wages automatically, and their employer pays a further amount on top. If you are self employed you pay Class 4 National Insurance on your profit, currently 6% on profit between £12,570 and £50,270, and 2% on anything above that.

There is also Class 2, a small flat rate that historically protected your pension record. The rules around it have been simplified recently, so most self employed people with reasonable profits now build up their record without paying it. It is one of those areas where the detail changes, so it is worth a quick check each year.

Paying into a pension is one of the most tax efficient things you can do, because the government effectively tops up what you put in. For a basic rate taxpayer, every £80 you pay in is boosted to £100 in your pension. Higher rate taxpayers can claim back even more through their tax return.

If you run a limited company, the company can pay into your pension directly, and that contribution usually counts as a business cost, which reduces its corporation tax. This is often a very efficient way to take money out of a company for your future.

There are limits on how much you can put in each year while still getting relief, so it is worth planning rather than leaving a large contribution to the last minute. As with anything involving your own money and the future, this is general information rather than personal advice, and the right amount depends on your wider circumstances.