If you're self employed you'll sleep more soundly at night - and keep the tax man happy - by following this guide to paying your own tax and NI.

By John Edwards,
ATII ATT TEP Chartered Tax Adviser.

One of the realities of working for yourself is having to be responsible for your own tax and National Insurance. But some careful groundwork at the start of your venture and a small amount of bookkeeping on a regular basis shouldn't result in any teeth-gnashing come the end of the financial year.

Getting started

"So there are no nasty shocks when the tax and NI bill comes, it's a good idea to put away around 25 per cent of everything you earn to pay it."

The first task is to let the Inland Revenue, the VAT man and the DSS know that you're self employed and starting your own business. You'll need to give them the following:
• start date
• description of activities
• business name (if appropriate)
• business address
• tax and National Insurance numbers if you have them.

This information can be reported to all three of these government departments in a form in the Inland Revenue booklet called 'Starting you own business?' It will tell you all you need to know about paying tax and NI, and includes a direct debit form so you can pay your weekly stamp.

The good book

It will then be necessary to keep records of your business either manually or electronically. There are a number of computer programs especially for small businesses on the market, from around £40. However if you prefer it's quite adequate to keep a simple book recording all income and expenditure relating to the business.

Some good bookkeeping practices include:
• Keep all expenditure (capital expenditure like computers, as well as day-to-day items such as stationery) on the left hand side of the page, and incoming payments on the right.

• Keep a separate book for invoicing and cross reference with payments in other book.

• Be meticulous about receipt-keeping. File them in date order and keep them in separate monthly envelopes.

Finding an accountant

When it comes to filing your tax return you may want to seek professional advice. You should look for a local, qualified professional who has one of these accounting qualifications:
• Chartered Tax Adviser designated FTII or ATII
• Chartered Accountant designated FCA or ACA
• Certified Accountant designated FCCA or ACCA

Personal recommendations from friends and colleagues are usually best. Fees vary enormously according to the nature of your business, the level of expertise you need and degree of difficulty of the work.

A sole practitioner in a small village in the country may charge say £200 per year for example for fairly basic accounts, while a large international firm in London may charge thousands for more complicated work.

You should expect an initial meeting free of charge, without any obligations, at which time you should be advised of the service you can expect and the charging structure.

A timely return

The tax year runs to 5 April every year and you or your tax adviser will have to prepare a tax return showing your self-employed activities for the year just ended.

Tax and National Insurance contributions are normally paid at the same time, in two instalments each year - on 31 January and 31 July. In your first tax return as a self employed person you would pay your total tax liability including Class 4 National Insurance on 31 January, following the submission of your return in April, nine months after the end of the tax year.

At the same time as you pay tax for the first year you'll be required to pay a further 50 per cent of that amount as a sort of down payment on tax due to be owed for the second year, and the final 50 per cent on 31 July.

After you submit your second year's tax return, the tax liability is then calculated and if you've paid too much your IR account will be credited for the following year.

No nasty surprises

Accountants always say it's a good idea to open a deposit account and put away around 25 per cent of everything you earn to pay your tax and NI bill. That way there are no nasty shocks when the tax bill comes.