Top Tips for Avoiding Tax Hell if You're Self-Employed
The January 31st deadline for submitting your Income Tax Self-Assessment online has recently passed. However, this year nearly 750,000 people missed the and are likely to face some hefty financial penalties from HMRC.
To make sure that you don’t fall into that category next year, and to make the whole self-assessment process as easy as possible, we’ve put together some top tips for you to follow:
Beat the Deadlines
First of all it’s worth making a note of all the relevant deadlines for getting your taxes done, and the penalties for missing them.
If you’ve just become self-employed, or otherwise eligible to fill out the Income Tax Self-Assessment, then you must make sure that you’re registered in time. The deadline for registering is the 5th of October in the second tax year (which runs from the 6th of April to April 5th the following year) that your business has been operating for.
So for example, if you started working as self-employed any time between 06/04/16 and 05/04/17, then the deadline to register as self-employed would have been the 5th of October 2017.
Once you have successfully registered as self-employed with HMRC, then the deadline for completing the Self-Assessment and making the tax payment for the previous tax year is January 31st.
You first payment must be made by January 31st, and your second payment on account must be made by July 31st.
Failure to meet any of these deadlines could see you incur a £100 fine for being up to 3 months late, and the fines will increase if you’re even later than three months.
Keep Your Books Tidy
Good bookkeeping is not only essential to help steer yourself clear of tax hell, but is also a legal necessity for you to keep financial record for five years when self-employed. If you fail to keep adequate records you could put yourself in line for a fine.
However, beyond it being necessary for tax purposes, it is also just generally good business practice, and keeping good business records will help you save time and therefore money down the line. So sort yourself the filing method that works best for you! Whether it’s keeping paper copies of everything you need, going digital, or both, it pays (literally) to be organised here.
Save Where You Can!
While tax evasion is a crime, tax avoidance is smart business practice. Consider the various ways in which you can legally work to reduce your tax bill each year. For example, there are a whole host of tax free allowances, such as paying into a pension scheme, which can all help insulate your money from taxation. Various necessary business expenses also fall into this category, so look into what sort of expenses could be covered by this. For example, you could save on office or room rental costs, the cost of travel or supplies, and you can even claim tax deductible business expenses on the accountant you hire to help with all of this!
As a self-employed individual, particularly if you’re a sole trader or freelancer, keeping track of your expenses can make a massive difference come January. The government has a helpful website that shows you the kinds of things you can and can’t claim for, and you can find it here: https://www.gov.uk/expenses-if-youre-self-employed
If you’re working from home, you can claim a flat percentage of your household expenses such as gas & electricity and council tax, based on the number of hours you spend working at home each month.
Crucially, you should make sure that you keep all relevant receipts (e.g. for fuel or stationary), so that you’ve got a record for when you come to count everything up at the end of the year.
Prepare to Pay
Remembering that the only things that are certain are death and taxes, don’t get caught short when it actually comes to paying up! Because you’re paying a lump sum of tax when you’re self-employed, rather than having the tax deducted from your monthly salary, you can prepare for this considerable financial outlay by setting aside an amount of your earnings each month. .Aside from your personal allowance of £11,500 (for 2017/18), you are going to have to pay tax on everything you earn. The best way to keep on top of it, and to avoid a nasty shock in January, is to effectively pay it in advance. Work out roughly what you’re supposed to be paying, and put it in a savings account each time you get paid. Always keep in mind that that money technically isn’t yours, it’s the taxman’s.
Remember the tax brackets are as follows:
£11,501 - £45,000 = Basic rate (20%)
£45,001 - £150,000 = Higher rate (40%)
£150,001 + = Additional rate (45%)
And don’t forget National Insurance – you’ll generally pay two levels of NI if you’re self employed.
If your profits are over £6,025 in the year, then you pay class 2 NICs of £2.85 per week.
If your profits are over £8,164, then in addition to class 2 NICs you also pay class 4 NICs, which are calculated as follows:
- 9% on profits between £8,164 and £45,000
- 2% on profits over £45,000
Remember that because of payments account, you’re technically paying in advance each year, plus a balancing payment from the previous year, so if this is your first year of self employment, you’ll have to effectively pay twice over.
The records that you will need to keep are of all your business’ incomes and sales, and its profits and losses, and any business expenses – essentially keep a detailed balance sheet. You also need to keep VAT records if your business has over £85,000 turnover per year, and therefore qualifies for VAT. Additionally if you employ anyone besides yourself then you need to keep PAYE records for them, and of course records of your own income, or how much you take out of your business as well.
You need to be able to prove the figures that you’re keeping in your detailed balance sheets, and the best ways to do this are to keep any and all business related receipts, bank statements, invoices, and chequebook stubs.
Sometimes it can pay more in the time you’ll save getting a qualified accountant to look over your books and make sure everything is in order for your business. It’s the job of your accountant to make sure that you’re paying the right amount of tax, and they can also help you fill out the Self-Assessment form itself. Additionally if you hand over your various financial proofs to them, i.e. receipts and invoices etc. they can also do your financial bookkeeping for you. If you have the funds, investing in an accountant can be a smart move to give you more time to focus on your business, and give you peace of mind that all the tricky tax stuff is being handled by a qualified professional.