Self-Employment Tax and HMRC Penalties

If you are self-employed as a sole trader or in a business partnership in the UK, you must report your income and expenses to HMRC each year. The tax year runs from 6 April to 5 April. Most self-employed individuals must complete a Self-Assessment tax return form reporting their earnings.

You will owe income tax and National Insurance contributions (NICs) on any profits earned. The rates vary depending on your total taxable income but can reach up to 45% income tax and 2% NICs on profits over £50,270 per tax year. Self-employed National Insurance is charged at £3.45 per week Class 2 and 9% Class 4 on annual profits between £12,571 and £50,270 (for the 2023/2024 tax year).

In addition to income tax and NICs, you may need to register for VAT if your taxable turnover exceeds the VAT registration threshold - £85,000 as of April 2022. As a VAT-registered trader, you must charge VAT on sales and report VAT owed to HMRC.

Keeping Records

As a self-employed individual, you are responsible for keeping complete and accurate records of all business income and expenses. This includes invoices, bank statements, receipts, bills, contracts, mileage logs, accounting records, and other supporting documents.

Good record-keeping is essential for calculating your total taxable profit yearly, maximising allowable expense deductions, and complying with HMRC rules and requests. You may face financial penalties if your records are later found incomplete or inaccurate.

Filing Your Self-Assessment Tax Return

Most self-employed individuals must complete an annual Self-Assessment tax return to report their income and expenses, calculate their liabilities, and pay any tax owed. The process includes:

● Registering for Self-Assessment with HMRC

● Keeping records throughout the tax year

● Completing the SA100 tax return form after the tax year ends

● Reporting total taxable income and profits

● Claiming any allowable expenses

● Calculating taxes owed, including income tax and NICs

● Paying your Income Tax and Class 4 NICs liability in full or arranging a payment plan

● Submitting your completed tax return to HMRC by the filing deadline

The deadline for paper tax returns is midnight on 31 October, following the end of the tax year. For online returns, the deadline is midnight on 31 January. You will receive a notice to file a letter from HMRC reminding you of your obligations. If you miss the tax return deadline, you immediately face a £100 penalty, followed by additional fines for continued late filing.

Paying Your Tax Bill

As calculated in your Self-assessment return, you must pay the full Income Tax and Class 4 National Insurance owed for the tax year by 31 January following the end of the tax year. You can request that some tax be withheld at source to count towards your bill through the PAYE system. Any remaining balance due must be settled directly to HMRC by the January deadline.

If the total tax you owe for the year is less than £1,000, you can pay the entire balance by 31 January or split your payments over 12 months as Payments on Account. Each POA instalment is half your total tax bill for the year.

If you miss the final tax payment deadline on 31 January, you will automatically be charged a 5% late payment penalty on any outstanding tax not paid. Further fines will accumulate after 30 days and continue to grow the longer your tax remains unpaid.

Late Tax Return Filing Penalties

Self-employed individuals face various financial penalties from HMRC for errors, omissions, failures, inaccuracies, late filings, and late payments regarding their annual taxes. Some of the most common HMRC penalty charges include:

● £100 automatic fixed penalty if your return is up to 3 months late

● Over 3 months late — daily penalties of £10 per day up to £900

● Over six months late — additional £300 or 5% of tax due penalty

● Over 12 months late — another £300 or a further 5% of tax due fine

Late Payment Interest and Penalties:

● 2.75% interest on late tax payments (as of December 2022)

● 5% late payment penalty on top of interest after 30 days

● Further 5% penalties every six months your tax remains unpaid up to the total tax amount owed

Inaccuracies & Errors Penalties

● Up to 30% of lost tax revenue for careless inaccuracies

● Up to 70% penalty for deliberate errors

● £300 fine for failing to report income or gains on offshore assets

Poor Records Penalties:

● £500 - £3,000 for inadequate business records

● Additional tax-geared penalties based on the type and severity of record-keeping failures

Repeated Defaults Penalties

● Persistent late filing, payment failures, errors or poor records may prompt further penalties

Tax Return Amendments

● Submitting an incorrect return that requires correction can prompt additional fines

Appealing Penalties

If you believe you have wrongly received a penalty charge, you can formally appeal to HMRC, citing reasonable cause. However, appeals are only sometimes successful. Maintaining accurate, complete business records and diligently filing your taxes on time is the best way to avoid penalties.

Using an Accountant: To help stay compliant and avoid any costly errors or mistakes, many self-employed individuals enlist the services of an accountant or tax advisor. They can provide guidance on allowable deductions, keep required accounting records on your behalf, prepare and submit accurate tax returns, and advise you on any tax payments required and deadlines.

Meeting your self-employed tax obligations is critically important, albeit complex. As penalties for late filing and payment can quickly accumulate into substantial fines, it pays to plan, maintain thorough records, claim all relevant expenses, and complete your Self-assessment diligently every year. Seeking professional accounting assistance can also help you steer clear of issues with HMRC and penalties.