Why Is My First Self Assessment Tax Bill So High?

If you’ve recently started as a sole trader and received your first Self Assessment tax bill, it can feel unexpectedly large. Understanding why this happens can help you plan better and avoid surprises.

How HMRC Calculates Your First Tax Bill

When you submit your first Self Assessment tax return, HM Revenue and Customs (HMRC) calculates your tax based on the income and expenses you report for the tax year just ended (which runs from 6 April to 5 April the following year). Unlike employees whose tax is deducted at source, sole traders must report all their earnings and allowable business costs themselves.

Your tax bill includes:

• Income Tax on your profits after deducting allowable expenses.
• National Insurance contributions (Class 2 and Class 4), which sole traders pay based on profits.
• Any other taxable income, such as rental income or dividends, if applicable.

Because this is your first return, HMRC doesn’t have previous years’ data to spread payments over, so the full amount for that year is due.

Common Reasons Your First Bill Feels High

1. Full Year’s Tax in One Payment
   Your first bill covers the entire tax year’s income, not just part of it. For example, if you started trading partway through the year but declared profits only for that period, your tax bill will reflect the profits you reported for that actual trading period.
2. Payments on Account
   After your first tax bill, you may be asked to make advance payments towards next year’s tax (called payments on account). These payments are usually each 50% of your previous year’s Income Tax and Class 4 National Insurance liability. While these can make your total payment due seem higher, they are advance payments and not additional tax.
3. Not Claiming All Allowable Expenses
   If your record-keeping is incomplete or you miss some allowable business expenses, your taxable profits will be higher, increasing your tax bill. Keeping thorough records such as receipts and bank statements helps ensure you only pay tax on your actual profit.
4. Underestimating National Insurance Contributions
   Sole traders pay Class 2 National Insurance at a flat weekly rate if profits are above the small profits threshold, and Class 4 National Insurance as a percentage of profits above certain limits. These contributions add to the total amount payable and are separate from Income Tax.

Example

Suppose you started trading in April and made £15,000 profit after expenses in your first year. You will pay Income Tax on the profit above your personal allowance (£12,570 for 2023/24 tax year) and the relevant National Insurance contributions. For example:

• Income Tax: £15,000 − £12,570 = £2,430 taxable profit subject to Income Tax at 20%, so £486 tax.
• Class 2 National Insurance: paid at a flat weekly rate if profits exceed £6,725 (2023/24 threshold).
• Class 4 National Insurance: 9% on profits between £12,570 and £50,270.

If you didn’t keep records of all expenses or forgot to deduct some costs, your taxable profit—and therefore tax bill—would be higher.

What Can You Do?

• Keep Accurate Records of all your income and expenses throughout the year to ensure your tax return reflects your true profit.
• Register for Self Assessment Early to avoid penalties and to understand your tax obligations.
• Check Your Tax Return Carefully before submission to include all allowable expenses and income.
• Plan for Payments on Account so you’re prepared for future tax bills.

If you think your bill is incorrect or you’re struggling to pay, contact HMRC to discuss your situation. They can provide guidance and may offer payment options.

Official reference: https://www.gov.uk/self-assessment-tax-returns. Always check the latest official guidance. Related forms: Browse our form category.

Important: This article provides general information. Government rules, forms and procedures can change, and this article may not reflect the latest updates. Check current GOV.UK guidance or the relevant authority before relying on it. ITG & Co. is independent and is not affiliated with a government department.