Missing out on retirement plan contributions can limit savings and tax benefits.

Common Tax Mistakes for the Self-Employed: Avoid These Pitfalls

When you’re self-employed, navigating your tax obligations can seem overwhelming. It’s essential to understand whether it’s more frustrating to pay your tax bill or to realize you’ve overpaid. Fortunately, with proper preparation, filing your small business taxes can be a straightforward process.

Every year, self-employment taxes can be tricky. Errors can lead to late submissions or inaccuracies, which may result in hefty penalties and extensive investigations by HMRC. This guide highlights the five most common tax mistakes made by self-employed individuals, helping you avoid unnecessary stress.

1. Failing to Register for Self-Assessment

Are you aware that if you earn more than £1,000 from one or more trades, you must register for self-assessment with HMRC? Although this threshold is set to increase to £3,000 by 2029, it’s crucial to act promptly to avoid penalties.

While everyone is entitled to a personal allowance of £12,570 for the 2025/26 tax year without paying income tax, you still need to declare any earnings below this threshold. Don’t forget: even if you’re employed, your self-employment income won’t automatically have taxes deducted, making it vital to inform HMRC about your earnings to facilitate your self-assessment tax return.

Keep in mind that the registration deadline is October 5 each year. Also, with the introduction of Making Tax Digital, digital record-keeping will become mandatory for self-employed individuals by April 2028.

2. Inadequate Submission of Self-Assessment Tax Returns

Missing the January 31 deadline for submitting your online self-assessment tax return is a common blunder. If you opt for paper submissions, remember that the deadline is October 31. Delays in submission can lead to significant penalties:

• A £100 fine for being one day late.
• An additional £10 fine per day up to a maximum of £900 if you’re over three months late.
• A £300 fine or 5% of the tax owed, whichever is higher, if you’re over six months late.
• Another £300 fine or 5% of the tax owed for being over 12 months late.

Proactively handling your deadlines can prevent these fines from piling up and save you significant stress.

3. Neglecting to Save for Your Tax Bill

Tax bills can come as a shock if you haven’t saved throughout the year. To avoid scrambling at the last minute, it’s advisable to set aside a percentage of your income each month. Consider opening a separate savings account just for taxes, ensuring the funds remain untouched until the deadline arrives.

4. Misreporting Income

Another frequent error is misreporting income. Many self-employed individuals face penalties due to incorrect financial records. To prevent this, diligently track your income, keeping all receipts and invoices during the tax year. Proper record-keeping not only protects you from penalties but also supports any expense claims.

If you incorrectly report your income, the penalties vary based on the nature of the mistake:

• No penalty for reasonable care.
• 0% to 30% of the additional tax owed for careless mistakes.
• 20% to 70% for deliberate underreporting.
• 30% to 100% for attempted concealment.

You can rectify mistakes on your tax return within a year of the filing deadline through HMRC’s online platform.

5. Ignoring National Insurance Contributions

National Insurance (NI) contributions are critical to funding the UK’s welfare state. As a self-employed individual, you typically pay two types of NI based on your earnings:

• Class 2: Voluntary, at £3.50 per week.
• Class 4: Required if you earn £12,570 or more annually.

Ensure you pay your National Insurance to avoid penalties. You can make payments through your self-assessment tax return or opt for voluntary contributions via the HMRC website.

Conclusion

By staying organized and understanding your responsibilities, you can significantly reduce the stress associated with self-employment taxes. For further resources, consider reading our Self-Employed Invoice Template for tips on creating your invoices effectively.