If you’re working as a contractor, freelancer, or consultant, you’ve probably heard about self-assessment tax returns. The whole process can feel overwhelming, especially when you’re used to having taxes automatically deducted from employee paychecks.
Let’s break down what self-assessment means and how to handle it without the stress and confusion that trips up many contractors.
What Is Self-Assessment?
Self-assessment is how you report your income and pay taxes when you’re self-employed. Instead of an employer deducting taxes from your pay, you calculate what you owe and pay it directly to HMRC.
Think of it as taking responsibility for your tax obligations. You’re essentially doing the job that a payroll department would normally handle for employees.
Who Needs to Complete Self-Assessment?
You’ll need to file a self-assessment return if you:
- Earn more than £1,000 per year from self-employment
- Work through your own limited company
- Have multiple income sources
- Earn over £100,000 per year from any source
- Receive income that hasn’t had tax deducted at source
Most contractors fall into at least one of these categories, making self-assessment a necessary part of business life.
Key Dates You Can’t Miss
October 5th: HMRC sends out paper tax return forms (if you still use them)
October 31st: Deadline for paper returns
January 31st: Deadline for online returns AND payment of any tax owed
July 31st: Deadline for second payment on account (if applicable)
Missing these deadlines triggers automatic penalties, so mark them clearly in your calendar and set reminders well in advance.
What Information Will You’ll Need
Gather these documents before you start:
Income Records:
- All invoices you’ve sent to clients
- Bank statements showing payments received
- Records of any cash payments
- Interest in savings accounts
- Any other income sources
Expense Records:
- Office supplies and equipment
- Travel costs for business purposes
- Professional development courses
- Insurance premiums
- Accountancy fees
- Home office costs (if working from home)
Personal Information:
- National Insurance number
- UTR (Unique Taxpayer Reference) number
- Previous year’s tax return (for reference)
Understanding Allowable Expenses
As a contractor, you can claim expenses that are “wholly and exclusively” for business use. This includes:
Equipment and Supplies: Computers, software, stationery, and tools needed for your work
Travel: Journeys between different work locations (but not your regular commute to a permanent workplace)
Professional Development: Training courses, certifications, and industry publications
Home Office Costs: Portion of household bills if you work from home regularly
Professional Fees: Accounting services, professional memberships, and legal advice
Important: Keep detailed records and receipts for everything you claim. HMRC can ask for proof of any expense, and missing documentation can lead to claims being rejected.
The Two Main Calculation Methods
Traditional Method: Calculate your actual income minus actual allowable expenses. This gives you your profit, which is what gets taxed.
Cash Basis: Simpler method where you only record money when it actually enters or leaves your bank account. This is often easier for small contractors but has some limitations on what expenses you can claim.
Most contractors earning under £150,000 can choose either method, but cash basis is usually simpler for straightforward contracting work.
Tax Rates You’ll Pay
Income Tax: Same rates as employees – 20% basic rate, 40% higher rate, 45% additional rate
National Insurance: Class 2 (if profits over £6,515) and Class 4 (9% on profits between £12,570 and £50,270, then 2% above that)
Student Loan Repayments: If applicable, based on your total income
The key difference from employment is that you pay everything in lump sums rather than monthly deductions.
Payment on Account Explained
If you owe more than £1,000 in tax, HMRC assumes you’ll owe similar amounts next year. They’ll ask for two “payments on account” – essentially paying next year’s tax in advance.
First payment due by January 31st (same day as your tax return), second payment due by July 31st. When you complete next year’s return, any overpayment gets refunded, or underpayment gets added to your bill.
This system catches many contractors off-guard, so plan for it financially.
Common Mistakes to Avoid
Mixing Personal and Business Expenses: Keep separate records for business costs. Personal expenses aren’t deductible even if paid from a business account.
Poor Record Keeping: Don’t rely on memory or reconstructing records later. Track everything as it happens.
Missing Deadlines: Late filing and payment penalties add up quickly and are mostly unavoidable once triggered.
Claiming Inappropriate Expenses: Only claim costs that are genuinely for business purposes. Questionable claims invite scrutiny from HMRC.
Not Planning for Tax Bills: Set aside money throughout the year rather than scrambling to find cash at payment time.
Setting Up Your Record-Keeping System
Choose Your Tools: Simple spreadsheet, accounting software like QuickBooks or Xero, or even a dedicated app for contractors.
Create Categories: Set up expense categories that match your business needs and make sense for your tax return.
Establish Routines: Update records weekly rather than leaving everything until year-end.
Digital Storage: Photograph receipts immediately and store them organized by date and category.
Bank Account Management: Consider a separate business bank account to simplify tracking.
When to Get Professional Help
Consider hiring an accountant if you:
- Have complex income arrangements (multiple contracts, different payment structures)
- Own business equipment with depreciation calculations
- Work internationally or have foreign income
- Face IR35 determinations
- Feel overwhelmed by the process
- Want to optimize tax efficiency legally
Professional fees are tax-deductible business expenses, and good advice often saves more than it costs.
IR35 Considerations for Contractors
If you work through your own limited company, IR35 rules determine whether you’re genuinely self-employed or should be treated as an employee for tax purposes.
Off-payroll working rules mean many clients now make this determination for you, but understanding the basics helps you structure contracts appropriately and avoid unexpected tax bills.
Key factors include control over how you work, whether you can send substitutes, financial risk, and integration into the client’s business.
Planning Throughout the Year
Monthly Reviews: Check your income and expenses regularly to spot any issues early.
Quarterly Estimates: Calculate rough tax liability every three months so there are no surprises.
Tax Savings: Put aside 25-30% of profits for tax bills (adjust based on your actual rate).
Expense Planning: Time major business purchases to optimize tax efficiency.
Income Timing: Where possible, consider timing of invoicing to manage tax years effectively.
Digital Tax and Making Tax Digital
HMRC is moving toward digital-only processes. From April 2024, most self-employed people with income over £10,000 must use compatible software and submit quarterly updates.
This affects record-keeping requirements and filing processes, so stay informed about changes that apply to your situation.
The Bottom Line
Self-assessment doesn’t have to be a yearly panic attack. With proper planning, decent record-keeping, and understanding of the basic principles, it becomes a manageable part of contractor life.
The key is treating tax obligations as an ongoing business responsibility rather than a once-yearly emergency. Start early, stay organized, and don’t hesitate to get professional help when you need it.
Your contracting business deserves proper financial management. Taking control of your self-assessment process is an important step toward long-term success.
What aspects of self-assessment do you find most challenging? Share your questions in the comments below – chances are other contractors are facing the same issues.
