Self-Employment Income

So now that you are registered as self-employed, it’s time to start getting to grips with the rules that HMRC want you to live by and the bookkeeping side of your business! Don’t worry, it’s easy once you know how.

If you haven’t registered as self-employed, then check out this guide.

In this guide, I’ll help you to understand the basics when it comes to what counts as business income, paying tax on it and keeping records for HMRC.

What Counts as Business Income?

Your business income is everything you get paid by your customers and clients whether face-to-face, online or by bank transfer.

You’ll find this information from things like your:

  • Invoices
  • Credit notes
  • Cash takings
  • Transfers
  • Statements from payment processing and marketplaces like stripe or Etsy

It also includes any money you get paid to cover expenses, even if they are a simple re-charge back to your client. You won’t be taxed on it because you’ll be able to claim back any re-charged expenses as an expense. But you’ll still need to record it separately as business income.

recording your business income
#2 Recording Self-Employment Income

What Tax Do You Pay On Your Business Income?

When you’re self-employed you’ll pay tax on all your business income after deducting expenses, for each tax year.

A tax year runs from 6 April to 5 April each year. And each year you’ll need to add up all your business income and expenses, declare these numbers on a tax return, paying tax on the profit you have made.

The self-employed pay:

  • Income tax
  • Class 2 national insurance
  • Class 4 national insurance

The more money you make, the more of each of these you’ll pay.

When it comes to filling out your tax return a handy trick is to use the cash accounting scheme. That way you’ll only pay tax on the money your customers have actually paid you.

Remember the same goes in reverse – you can only expense things you paid for against your tax bill.

What Records Do You Need to Keep for HMRC?

You’ll need to keep copies of all the invoices you have sent to your clients and statements you receive from marketplaces or payment processing.

That’s because HMRC wants to see evidence of what you have included on your tax return or use it to get a feel for what may have been missed out when declaring income.

It helps to keep a list of all the invoices and credit notes you send out. My bookkeeping spreadsheet has a tab that lets you summarise all this information, as well as marking off which are paid so you know exactly who owes you money!

New Here? These are my most popular resources:

  • The Ultimate Bookkeeping Spreadsheet – Organise your money, track the numbers that matter and stay on top of your cash;
  • Freebies – templates, spreadsheets, calculators and cheat sheets. Here you’ll find all my freebies for the self-employed community, all in one place.
  • Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
  • FREE Business Expenses Cheatsheet – Check what you can and can’t claim as an expense against your taxes.
  • 6 Core Elements of Self-Employment Taxes – Confused by taxes? Worried you’re missing something when it comes to tax allowances and reliefs? These easy to follow 6 mini-guides will have you on top of the tax side of things in no time at all.
Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of - a UK small business finance blog where she shares help and advice with the self-employed community to make topics like registering a business, bookkeeping and taxes easy to understand.