There are many joys to being self-employed. Being your own boss, working flexible hours and directly benefiting from your own creativity are just a few. However, whether you’re a freelance artist, accountant, mechanic or writer, you still need to manage your income and pay tax. If you’ve switched from a full-time job then managing your own tax affairs will be new. HMRC certainly doesn’t make it easy. However, there are ways to make sure that you’re on top of your obligations, as well as minimising the amount that you need to pay.
Register with HMRC
When you become self-employed you’re obliged to register with HMRC. There are time limits that apply to when you need to register. The latest date by which you can register without incurring penalties is 5th October after the end of the tax year for which you need to file a tax return. Tax years run from 6th April to the following 5th April.
Make record keeping a priority
Many people leave their tax affairs and records until months or weeks before their tax return is due. This can be chaotic and makes it very easy to make mistakes or forget things. When you’re self-employed you need to keep at least basic records of all your income (sales and takings). Make sure you note everything that you’ve spent too – expenses and business purchases can be set off against your tax bill. You can claim a range of expenses when you’re self-employed. This could include travel, rent or mortgage for use of your home for work, stationery supplies and tech. Bank statements, phone bills, invoices, receipts, mileage records and cashbooks are all key to hold on to.
If you choose to file a paper return then your deadline is 31 October after the end of the tax year. If you’re filing online then the deadline is 31 January after the end of the tax year.
Making payments for the tax that you owe
Ever since HMRC introduced payments ‘on account’ self-employed tax has become more complicated. Now, rather than simply making one tax payment based on what your tax return says you owe, there are three deadlines:
January 31 – pay the balance of what you owe from the previous year (i.e. what you owe less the payments on account already made).
January 31 – make your first payment on account for the current year.
July 31 – make your second payment on account for the current year.
The payments on account are usually around half of what you calculate you owe in tax for the current year. It’s these payments on account that can leave some people with a much larger tax bill than anticipated. Although many accountants and self-employed people have queried the logic of payments on account the system remains. And although your money sits in HMRC’s bank accounts earning them interest – rather than you – there isn’t currently any choice but to comply.
What happens if you miss the payments?
HMRC offers very low-interest repayment on direct debit payments if you are struggling to pay your tax bill in one go. It’s important to let them know as soon as possible if you’re not going to be able to pay your tax. If you file your tax return and don’t pay the tax then you may end up being charged penalties. For example, a tax return more than three months late can incur a £100 fine. If you don’t pay your tax at all then HMRC can take ‘enforcement action’ against you. This could include selling your possessions and taking payments directly from your wages.
Staying on top of your obligations
One of the easiest ways to make sure that you always have enough to pay self-employed tax is to save each month. Put aside around 20 -30% of your earnings (depending on what you do) and you should never be short.
Reducing tax liabilities
It’s worth speaking to a professional to make sure you’re maximising your tax efficiency. For example, you could incorporate yourself as a limited company. This would mean that you never pay more than the Corporation Tax rate (20% or 21%). Doing this offers real advantages for those who fall into the higher rate tax band. It may also be worth registering for VAT. Under the Flat Rate VAT Scheme you charge one rate of VAT but pay a lesser rate to the government. This can result in a small, but useful, profit.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley