Tax and NI

3. Tax for the Self-employed

3.1 The self-employed pay income tax on their profits - not on their drawings. For example, if you make £30,000 profit, you pay income tax on the full £30,000 - even if you draw only £10,000 as salary.

• Profit is business turnover less allowable expenses, excluding your salary (see 6 and 7).

3.2 You pay tax on the profits made over the accounting period (usually 12 months) which ends in that tax year.

• Tax is due in two equal instalments, on 31 January (during the tax year), and on 31 July (after the end of the tax year).
• The interim amounts payable are based on the previous year's tax liability. Arrangements can be made to cut payments, if profits are falling.
• If the profits made are higher than those for the previous year, a balancing payment is due on the following 31 January.

3.3 New businesses may be taxed twice on their first year profits, depending on the accounting period you choose.

• 'Overlap relief' will be available to compensate you for this, but the calculations are complex and there will always be a cashflow cost to the business. Consult your accountant or tax adviser.

3.4 Tax planning can ensure that the self-employed pay the tax due much later than employees.

• For example, if your accounting period ends on 30 June 2007, you pay tax on the profits for the period on 31 January 2008 and 31 July 2008 (both payments being based on the previous year's tax liability). The final payment (based on actual profits) will not be made until 31 January 2009.