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 1. Do-it-Yourself 
 2. Tax Basics 
 2.1 Is it taxable? 
 2.2 Registering 
 2.3 Book-keeping 
 2.4 Income Tax & NI 
 2.5 Income & expenses 
 2.6 Tax credits 
 2.7 VAT 
 2.8 Overseas 
 2.9 Multiple income sources 
 2.10 Crazy ideas 
 3. Background Stuff 
 4. Accountants 
 5. Tax Nightmares 
 6. Reference 
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 8. About TaxRelief4escorts 
 9. Disclaimer 
2.4 Income Tax & NI
Self assessment Tax calculation
Income tax was introduced in 1799 as a temporary tax to help pay for the war against Napoleon. Although it was abolished after the battle of Waterloo it was soon re- introduced and we've been paying it every year since 1842.
In principle income tax is a fair, or progressive, tax. The amount you pay depends on how much you earn, and if you're self employed you only pay it on what's left after taking off your business running expenses (more about that later). The first £5,225 of your total income each year is not taxed at all, then you pay 10% on the next £2,230, 22% on the next £32,370, and finally if you earn more than £39,825 you get charged 40% on the rest.
From 6 April 2008 there are significant changes. The tax free personal allowance goes up to £5,435. The next £36,000 of your income is taxed at 20% and the rest is taxed at 40%. That is the basic picture although it is slightly more complicated than that because of some very strange tax rates on dividend income.
The government likes to pretend that National Insurance is not a form of taxation, and you will sometimes still see it referred to as NHI (National Health Insurance) although it hasn't been called that since 1974. As far as you and I are concerned National Insurance (NI) is another tax on income. If you've previously been employed and paid NI through the PAYE system on your payslip you'll find the system for the self-employed quite different. You now have 2 separate types of NI to pay.
Class 2 NI is a fixed amount of £2.20 per week and it goes up to £2.30 from 6 April 2008. When you register with the taxman you have a choice of paying it monthly by direct debit or waiting for them to send you a bill for £28.60 every 3 months (£29.90 from April.) Class 2 NI secures your right to the basic state pension.
On top of that you get charged Class 4 NI which is worked out and collected with your income tax.  It's charged at 8% on your business income after taking off your business expenses. The first £5,225 is not liable to NI and you only pay 1% on your business profits over £34,480. From 6 April 2008 these bands are changing and the first £5,435 is exempt from NI but the 1% band does not kick in until £40,040.
Sorry if that all sounds complicated, there's an example coming up if you want to see what happens in practice.
Income tax is paid to the Inland Revenue under a system called Self- Assessment.
2.4.1 Self assessment
What does Self-Assessment mean?
graphic  What it means is that it is your responsibility to tell the Inland Revenue you are liable to pay tax, it's your responsibility to send in a Tax Return giving details of your income, and it's your responsibility to pay the right amount of tax at the right time. You can't sit back and wait for the Inland Revenue to ask you.
graphic  The Self-Assessment Timetable
  • When you start in business you have 3 months to register with the tax office
  • The tax year ends on 5 April (yes, it's a daft date - it's all to do with the change from the Julian to the Gregorian calendar in about 1742.)
  • The Inland Revenue should send you a tax return in early April
  • If they don't you have until 5 October to ask for one
  • If you send your tax return back (completed!) by 31 October (it has changed in 2008 from 30 September) then HMRC will work out your tax bill for you.
  • If you're sending in a paper tax return you must send it in by 31 October.
  • You have until 31 January to submit your tax return if you do it online or if your accountant submits it online (so that's 10 months to fill it in)
  • Also by 31 January you have to pay any tax owing for the year that you've just done the Tax Return for.
  • And on 31 January you need to make a first payment on account for the following year. This is normally half the previous year's total liability
  • And on 31 July you need to make a second payment on account.
graphic  Are there any penalties for not playing ball?
Just a few!
  • There's a £100 penalty for registering late
  • Interest is charged on any tax that's paid late
  • If you don't send in your tax return by 31 October there's a £100 penalty, although you have until 31 January to submit it online without getting a penalty
  • And another £100 if you still haven't sent it in by the following 31 July
  • The tax should be paid by 31 January, but if any of it is unpaid by 28 February there is a 5% penalty - that's on top of interest
  • If you conceal all or part of your income you will be charged interest and penalties. The penalties can be as much as 100% of the tax depending on the seriousness of the offence.
2.4.2 Tax calculation
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