For now, let's just tackle the question of how self-assessment is going to work for you.

*The tax year*

The tax year in the UK runs from 6 April to 5 April. Thus the 2005/2006 tax year starts on 6 April 2005 and ends on 5 April 2006.

*The Tax Return*

If you're self-employed, you have to submit a tax return that covers your earning activities during the tax year. If you have a job, you'll enter the employment information seen on your P60. You'll also enter bank interest or dividends you've received, and details of any self-employment income. You'll also enter pension contributions you've made, along with any charitable contributions. This isn't an exhaustive list, but you get the idea.

Then, you work out how much tax you have to pay (or, if you submit the return by September, the Revenue will do it for you).

From this amount, you take off any tax that you've already paid. For example, the tax you've already had deducted from your salary through PAYE on a monthly basis, or the tax that's already been deducted on any bank interest you're received.

The tax return, and any tax outstanding, is due in by the 31st January following the end of the tax year - so, for example, the 2005/2006 tax year ends on 5 April 206, and the tax return is due in by 31st January 2007.

If you're late, you'll automatically get saddled with a £100 fine.

As well as posting your tax return in, you can submit it online, or hand it in to your local tax office. Whatever you do, keep a photocopy or printout of what you submit.

*I Heard Something About 'Payments On Account - What Are They?*

When you work out the tax you owe, as well as paying your liability, you have to start paying in advance towards the following year.

For example, if your tax liability is £5,000, then as well as paying this, you have to make two payments on account of £2,500 each. The first payment on account is due along with the tax return, by 31st January. The second payment on account is due by the 31st July, six months later.

In time, this all works out nicely, because come the next tax year, if your tax liability is £5,000 again, then you've already paid this with your two payments on account, and you just have to go on paying your £2,500 payments on account in January and July.

Payments on account can be reduced if you think your tax situation will change in the coming year, but if you end up underestimating them, you could end up paying interest on them.

There are also 2 situations when payments on account don't apply:

- If your year-end liability is under £500 - If more than 80% of your tax liability was covered by tax deducted at source (e.g. PAYE, tax on bank interest) or by dividend credits (a whole different story, which we won't cover now).

So, to give you an example:

Malcolm starts self-employment alongside his normal job on 6 April 2006. When he comes to work on his 2006/2007 tax return, he has a total tax liability of £10,000. £7,000 of this was collected through PAYE, and the other £3,000 relates to his self-employment.

On 31st January 2008 Malcolm is going to have to hand over:

- £3000 (the tax he owes that has not already been collected) - £1,500 payment on account (because he doesn't meet the criteria for not paying it)

This is a big hit, and it helps (slightly) if you know in advance that it's going to happen. Come July, he's going to have to pay another £1,500.

Hopefully now you understand how you pay tax under UK self-assessment, and now you're ready to move on the bigger question of how you can save tax.