Thinking of going self employed? Know this first
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Here GoSimpleTax share top advice on the decision to go self employed and what you will need to do…
At the turn of the decade earlier this year, there were over 2 million freelancers in the UK. Combined, they contribute approximately £125 billion to our economy. And as working from home has never been easier, it looks likely that the demand for self-employment will only continue to rise.
The trouble is, self-employment isn’t as straightforward as simply winning business and doing the job. To ensure you don’t incur the wrath of HMRC, you need to register as self-employed and pay your taxes correctly. What’s more, you need the right records in place should you ever fall under investigation.
But don’t be overwhelmed. In order to support your dreams of working for yourself, we’ve asked Mike Parkes from GoSimpleTax to explain everything you need to know about your tax obligations.
Register as a sole trader
Firstly, you need to set up as self-employed and register for your Self Assessment tax return. This becomes a requirement once you start earning more than £1,000 from self-employment during a tax year, so there’s no harm in getting ahead.
Your Self Assessment tax return is due every year as of 6th April with a deadline of 31st January and summarises your earnings for HMRC so that they can accurately tax you.
Assuming you haven’t previously registered as self-employed, you’ll find two options waiting for you upon clicking through to the GOV.UK site:
- Register if you have not sent a tax return before
- Register if you have sent a tax return before
As this is the first time you’ll be submitting your records in order to pay Income Tax directly to HMRC, you’ll need to choose the former. You’ll have to wait for your 10-digit Unique Taxpayer Reference (UTR) number to come through. Once it does, you’re free to activate your account and start filing.
Keep detailed records
All invoices, receipts and bank statements need to be recorded. This isn’t just for safekeeping either – you’ll need them to input the correct information on your Self Assessment tax return and in case HMRC disputes your tax return submission.
There’s an added benefit to doing this too: you’ll have better visibility of the expenses you can claim for. Expenses reduce your tax liability – in other words, they can be deducted from your self-employed income to lower the total amount of profit that you’ll pay tax on.
Travel, tools and home office equipment are perhaps the most well-known examples of expenses. However, you can also claim back on:
- Financial help – Costs like professional indemnity insurance premiums and lease payments can be claimed back, although there are rules if you’re using cash basis accounting.
- Subscriptions – If you’re required to join a trade body or any professional membership organisations, the cost of the subscription can be claimed using your Self Assessment tax return.
- Stock – Any raw materials that you need to purchase for your trade, or the direct costs that arise from producing your goods, may be classed as allowable expenses.
Get ahead with your Self Assessment
Now that you know what to record and the deadline for submitting, why wait? Far too often, self-employed workers use the 31st January deadline as a benchmark of when to file. But there’s no good in leaving your Self Assessment tax return to the last minute.
In fact, in times of economic uncertainty, it pays to file early. Filing early doesn’t mean paying early (the deadline for paying any tax you owe for the previous tax year remains the 31st January), it just means you’ll know the amount of tax you owe ahead of time. This enables you to be better prepared for the payment.
Getting organised also means you’ll avoid the penalties for not filing or for not paying your tax bill on time. When you’re just starting out as self-employed, the last thing you want is to run into any avoidable fines – or get on the wrong side of the taxman.
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Self Assessment: Should You Defer Your Second Payment On Account?
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For those that are new to the Self Assessment tax return process, payments on account are one of the most common stumbling blocks. Despite being introduced as an initiative to help taxpayers spread their tax payments, it often results in annual frustration and can actually harm your cash flow if you’re caught unaware.
That’s why, in response to the COVID-19 pandemic, HMRC announced that they would allow taxpayers to defer their second payment on account (that would have normally been due on 31st July 2020). It is hoped that this gives taxpayers the chance to prepare. But is that the right course of action? We’ve brought in Mike Parkes from GoSimpleTax to set the record straight.
What is a payment on account?
Payments on account are advance payments towards your next tax bill. They’re calculated based on the amount that you paid the previous year.
HMRC splits this amount into two, and places the deadline for payment six months apart from one another. For the 2019/20 tax year, the first was due by midnight on 31st January 2020, and the second would normally be made by midnight on the 31st July 2020.
This latter payment is what can now be deferred, as long as it is eventually paid by the 31st January 2021.
If you had a £5,000 tax bill for the 2018/19 tax year, for instance, you would need to make two £2,500 payments on account towards your 2019/20 tax bill.
But if your 2018/19 Self Assessment bill was less than £1,000 or if over 80% was deducted at source (such as employment), then you will not need to make a payment on account – you would simply need to pay any outstanding tax by the 31st January.
What are your options?
If you are required to make payments on account, you will still need to pay your second one. Although, as HMRC has offered taxpayers the opportunity to delay this, you can choose to make your second payment as late as the 31st January 2021, alongside the submission of your Self Assessment tax return.
HMRC will not charge any interest or penalties should you choose to do this. However, by delaying your second payment to January, you do run the risk of having to fulfil all your tax responsibilities at once. This could result in you having insufficient funds in place to cover all your tax liabilities.
Your therefore have three options:
Pay in accordance with the original July deadline
If you can afford to pay your tax bill as you would do normally, you should do. If anything, it creates a sense of ‘business as usual’ in an otherwise tumultuous time.
I appreciate that, for many, paying in July will harm their cash flow. However, it is my view that clearing debt where possible is more sustainable and allows January to mark the start of a new financial year – and a fresh start.
Reassess and reduce liability
If you’re doubtful that you can afford a second payment on account right now, calculate your 2019/20 tax liability before the 31st July 2020. This will confirm the actual amount to be paid in July 2020, January 2021 and July 2021, and give you clarity. To do this, you need to file your 2019/20 Self Assessment tax return early.
Filing early won’t mean that you have to pay your tax bill early, after all – but it does allow you to determine what your total tax bill will be ahead of time. From here, you can consider two key points:
- Does the July 2020 payment on account need to be deferred?
- Do the January 2021 and July 2021 payments on account (for the 2020/21 tax year) need reducing to reflect the impact that COVID-19 has had on them?
Defer to later in the year
Of course, there will be some cases that are unable or unwilling to pay anything towards their tax bill in July now that they can defer. In this instance, it’s important that they are reminded of the Self Assessment late penalties should they wish to push this all the way back to 31st January and be unable to make payment at that time.
Deferring could have an impact on cash flow in 2020/21. If you are also VAT-registered and have deferred your VAT payment, then it is worth noting that this also needs to be paid by 31st March 2021.
Ultimately, it falls to you to make the decision that best suits you. However, it is my view that, by planning your 2021/22 payments now, you will be in a much safer position.
About GoSimpleTax
With GoSimpleTax, business owners can get a clear picture of their obligations. All your income can be logged in an easy-to-understand format, and their software will highlight areas where you can potentially reduce your tax liability through tax relief.
Register for their free trial today and stay abreast of all the latest tax changes. When you’re ready to file your Self Assessment tax return, upgrade to their full service and submit straight to HMRC.