There’s one topic that strikes fear into the heart of many a freelancer, and it’s tax. With good reason too, as getting in trouble with the tax man can literally cost you. The good news is that you don’t need to become an accountant to deal with tax as a business owner. You just need to understand the basics and follow the below tips to stay in HMRC’s good books.
Julia Day is a financial coach and accountant helping small business owners to gain the knowledge and confidence they need to manage their finances successfully and establish a positive relationship with money through 1:1 coaching, courses and business resources. In this week's post, Julia gives us advice to avoid getting into trouble with the tax man when you're self employed...
Tell HMRC that you’re self-employed
You’ll need to register as self-employed by 5th October in your second tax year of being self-employed (remember, the tax year runs from 6th - 5th April each year), but I’d suggest registering as soon as you become self-employed so you don’t forget.
Registering online is easy; all you need to do is go to the HMRC website and fill in a short form confirming your contact details and some details about your business.
Track your income and expenses
Whenever you make or spend money on your business, you’ll need to keep track of it as this is how HMRC will calculate how much tax you need to pay. You can keep track by using accounting software like Quickbooks or FreeAgent or with a simple spreadsheet.
It’s important to keep on top of bookkeeping, but it’s all too easy to fall behind and before you know it, you’ve got six months of receipts to catch up on. To avoid this, schedule your bookkeeping in your calendar like as a weekly or monthly appointment so you don’t forget about it.
Submit a tax return every year
As someone who is self-employed, you’ll need to fill in and submit a tax return every year. For most freelancers it’s a simple case of answering some questions and entering your income and expenses so HMRC can work out how much tax and National Insurance you need to pay. This is where being organised with your bookkeeping pays off.
The deadline for filing tax returns is 31st January and if you miss it, you’re likely to be hit with a hefty fine. You get a whole nine months between the end of the tax year on 5th April and the tax return deadline, so get yours in early and avoid the January rush.
Tax rates and thresholds
As someone who is self-employed, you’ll need to be aware of the tax rates and thresholds set by the government so you can work out how much tax you’ll need to pay. Here are the numbers you need to know for the 2018/19 tax year:
• You get a tax free personal allowance of £11,850 for the year.
• You’ll pay basic rate tax of 20% on profits between £11,851 and £46,350.
• You’ll pay higher rate tax of 40% on profits between £46,351 and £150,000.
• You’ll pay additional rate tax of 45% on any profits over £100,000.
• If your profits are £6,205 or more, you’ll pay Class 2 National Insurance Contributions of £2.95 per week, or £153.40 for the year.
• If your profits are £8,424 or more, you’ll also pay Class 4 National Insurance Contributions in additional to Class 2, which is 9% of your profits.
• If you were a student, you’ll make repayments of 9% of any profits you make over the set repayment threshold. If you started university before September 2012, this threshold is £18,330 and if you started after September 2012 it’s £25,000.
Don’t let these things catch you out
There are also some rules and regulations to be aware of to avoid getting tripped up or getting a shock when you see your tax bill. Here are the main ones you need to be aware of:
• Disallowable expenses
While you will be able to claim the majority of your business expenses against your turnover to lower your tax bill, be aware that there are some expenses that HMRC does not allow you to claim. The main disallowable expenses are taking clients out for food or drink, purchasing clothes for work (unless they are required for safety or are part of a uniform) and travelling to and from your regular work place. The best way to work out whether an expense will be allowed is to think about whether it’s “wholly and exclusively” for the purpose of your business - is it purely for business or does it also serve another, personal purpose such as keeping you warm?
• You can claim some of your utility bills as an expenses
If you work from home, you’ll be able to claim a portion of your bills as a business expense. You can either work out the amount to claim by dividing your bill by the number of rooms in your home, excluding bathrooms and hallways, and multiplying it by the percentage of time you work from the room you use when you work from home. You can do this for most household bills including council tax and rent, but not water. Alternatively, you can use simplified expenses [https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home] to claim a flat amount for your working from home expenses each month.
• Payments on account
Payments on account are a fairly recent addition to the world of Self Assessment tax, and in short mean that if your tax bill is over £1,000, you have to pay half of that amount towards your next tax bill on 31st January and 31st July. Then you’ll only need to pay the remaining amount of your tax bill (known as the balancing payment) by the payment deadline of 31st January of the next year, as well as your next payment on account. If you end up overpaying your tax bill because of payments on account, HMRC will send you a refund.