Blog What is Income Tax Self Assessment?: Overview for Self-employment
- AbraTax Team
In the realm of UK taxation, Income Tax Self Assessment (ITSA) plays a crucial role – especially for those of us engaged in self-employment or with additional income streams. This article aims to provide a concise overview of Self Assessment, with a focus on self-employment in the UK. If you’re a sole trader or thinking of setting up a new "side hustle", read on to learn more!
Income Tax Self Assessment, or simply Self Assessment, is a key system allowing His Majesty's Revenue and Customs (HMRC) to collect income tax. Unlike the more stereotypical income tax, where an employer deducts taxes automatically from an employee’s salary, Self Assessment is a means for businesses and self-employed people to report income and file their tax returns directly with HMRC.
Individuals in the UK are liable to pay income tax on their earnings stemming from a range of income streams. These may include full-time or part-time employment, pensions/savings, or income from self-employment (including profits from online sales).
Understanding your tax obligations is therefore of maximal importance for sole traders and individuals engaged in side businesses. While navigating the intricacies of business alongside other professional and/or personal commitments, it remains your duty to report earnings correctly and to submit tax returns on time.
If you are self-employed, working as a “sole trader” in the UK (see below), you must submit a Self Assessment tax return if you earn over £1,000 per tax year (ending 5 April). This does not necessarily mean that you will need to pay tax – but you must send HMRC details regarding your income.
If your main income stream is through a more traditional day job (i.e. with an employer automatically submitting tax returns on your behalf), you will still need to send a Self Assessment tax return for the income from your side hustle.
(Please note there are other reasons for sending a Self Assessment return beyond sole trading – for example, if you are engaged in a business partnership or had to pay Capital Gains Tax. For more details, and to check your specific eligibility, check out HMRC’s guidelines.)
According to HMRC, you’re a sole trader simply if you are working for yourself. In such instances, you are classed as self-employed – even if you haven’t told HMRC yet.
Examples of self-employment include running a business (e.g. you decide on your working hours and location, you are responsible for your business’s daily operations, you have multiple customers simultaneously) and/or selling goods or services (e.g. if you trade, produce products or provide services regularly for a profit – including online).
When planning to submit a Self Assessment, the first step is to keep accurate records surrounding your trade and earnings (see here for some inspiration!). These records include all sales and income, business expenses, VAT records (if applicable), and more.
Don’t forget to keep all relevant receipts, bank statements, invoices and any other “types of proof” regarding business/self-employment operations. It’s important to keep all these records in order to correctly calculate your profits (or losses) for the Self Assessment, as well to have the figures and evidence ready in case HMRC asks to check the details.
How to submit Self Assessment?
Your annual Self Assessment can be submitted online or (less commonly) by post. If you have not sent a Self Assessment tax return before, you must register for Self Assessment before the deadline (5 October) and receive your Unique Taxpayer Reference (also known as your “tax reference”).
Once registered for Self Assessment, you will need to calculate and submit your tax obligations for HMRC by the appropriate deadline (typically, 31 January for online users). This can be done manually through the HMRC website.
However, if you want to make the process smoother and work towards stress-free business, HMRC-recognised services such as AbraTax can provide helpful guidance to complete your Self Assessment in five simple steps – for free!
Navigating the landscape of Income Tax Self Assessment is a fundamental aspect of financial responsibility for people with diverse income streams and self-employed businesses alike. Whether you are a sole trader juggling a side hustle or successfully engaged in self-employment for primary income, understanding and fulfilling your Self Assessment obligation can help to ensure both smooth business and peace of mind.