Mortgages & Home Finance Working From Home & Tax

Date Published:

03/06/2008

Becoming self-employed and working from home gives you a chance to create your own business empire but it also means you are responsible for your own tax and National Insurance. Read our guide to putting your tax affairs in order.

By Sarah Jagger

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Once you've decided you want to be self-employed you must inform HM Revenue & Customs that you are in business. You are then responsible for telling the Revenue about your income and will be sent a tax return each year. Register as self-employed here.

You can find more information about self-employment in the booklet SE1 Are You Thinking of Working for Yourself? which you can get free from any tax office or download from the Revenue website.

How Much National Insurance Should I Pay?

Although not called a tax, you pay National Insurance Contributions (NIC) to the government, and what you pay varies on your income and employment status. You pay Class 2 NIC if you are self-employed. It's a flat rate contribution of £2.20 per week in 2007/08, unless you earn less than £4,635. Be careful, though, because anyone claiming small earnings exemption loses out on pension rights for any years for which contributions are not paid.

Class 4 contributions are also payable by the self-employed. If you have profits between £5,435 and £40,040 in 2008/09 you are liable to pay Class 4 contributions of 8 per cent of those profits. Find out more about NIC here.

How Do I Work Out My Self-Assessment Tax Return?

After you become self-employed you will receive a tax return. You have the choice of whether or not to work out your tax bill by yourself. If you don't want to do the workings yourself, you have to send your tax return by 30 September. You will then receive a 'notice of calculation', which shows how your tax liability has been worked out and tells you how much you have to pay and when. "Paper" returns must be submitted by 31 October but you have until 31 January to submit an online return.

If there is any tax outstanding it will have to be paid by 31 January. It is now possible to complete and submit your return online and see instantly what you owe - some 2.9m people did this in 2007. You can see how easy online filing is by downloading HMRC's Introduction to SA Online video podcast from the HMRC website.

When Do I Have To Pay My Tax Bill?

You have to make 'payments on account' on 31 January and 31 July. So for example for the 2007/08 tax year you have to make payments on 31 January 2008 and 31 July 2008 based on your tax bill for the 2006/07 tax year. Based on your return for the 2007/08 tax year, the Revenue (or you) can work out whether there is more tax to pay or whether you're entitled to a rebate. If you're sure you won't need to pay as much tax for the current year as you did in the previous year, you can ask to make lower payments on account.

What Are Penalties?

There is a £100 penalty if you miss the 31 October "paper" tax return deadline, whether or not you ask the Revenue to work out the bill. You have until 31 January to pay the tax.

If you miss the 31 January deadline for filing your online tax return, there is also a penalty of £100, A further £100 penalty will be imposed if you still haven't sent back your return by the 31 July following each deadline. If you don’t pay tax on time you will be charged interest on top. If you haven't paid the tax by 28 February (of the same year) you have to pay a surcharge of 5 per cent of the tax due. If the tax is still outstanding by 31 July, there's another 5 per cent surcharge, as well as the interest that's mounting up.

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