What Is Self Assessment Income Tax for Business Owners?
Self-employed individuals and company directors pay income tax through Self Assessment. Learn how it works and how to reduce your bill legally.
Key Takeaways
- Self-employed individuals pay income tax on profits through Self Assessment
- Company directors pay income tax on salary and dividends — dividends are taxed at lower rates
- The personal allowance (£12,570) means the first £12,570 of income is tax-free
- Self Assessment tax returns must be filed online by 31 January following the tax year end
Self-employed income tax
If you operate as a sole trader or partnership, your business profits are your personal income. You pay income tax through Self Assessment — filing a tax return by 31 January covering the previous tax year (6 April to 5 April). Income tax rates: 20% basic rate on income from £12,570 to £50,270; 40% higher rate from £50,270 to £125,140; 45% additional rate above £125,140.
Company directors: salary vs dividends
Directors of limited companies can receive income as salary and dividends. Salary is subject to income tax and National Insurance. Dividends are paid from after-tax company profits and taxed at lower rates: 8.75% basic rate, 33.75% higher rate, and 39.35% additional rate. The dividend allowance is £500 per year from April 2024. Many directors pay salary up to the NI threshold and take the remainder as dividends to minimise overall tax.
Payments on Account
Self-employed individuals owing more than £1,000 in tax must make two advance Payments on Account for the following year — each equal to 50% of the current year's tax bill, due on 31 January and 31 July. In the first year of filing, you may owe 150% of your expected annual tax bill in January — 100% for the current year and 50% as the first payment on account. Planning for this cash requirement is essential.
The personal allowance and high earners
The personal allowance of £12,570 means the first £12,570 of income is tax-free. Directors typically take this as salary — capturing the personal allowance without income tax. The personal allowance is reduced by £1 for every £2 of income above £100,000 and eliminated entirely at £125,140 — creating a 60% effective marginal rate on income between £100,000 and £125,140, making pension contributions particularly valuable for higher earners.
Self Assessment deadlines
The paper return deadline is 31 October. The online return deadline is 31 January following the tax year end (5 April). Tax due is also payable by 31 January. Missing the filing deadline incurs an automatic £100 penalty regardless of whether tax is owed. Further penalties apply at 3, 6, and 12 months late. HMRC charges interest on late payment at Bank Rate plus 2.5%.