Start-ups
It’s not now uncommon for people to start a job where they have been told they will be self-employed. In these circumstances the ‘worker’ hasn’t made a decision to start a business but must now take on the administrative and tax responsibilities of someone who has. People in these circumstances are not protected by the minimum wage and therefore may not be in a position to hire an accountant to look after their tax.
It is worth noting at this point that the deadline for registering for self-assessment for the tax year ended 5/4/2019 is 5/10/2019. Use the link https://www.gov.uk/log-in-file-self-assessment-tax-return to sign up. You will receive your personal unique tax reference number (UTR) and will be enrolled for the self-assessment online service at the same time.
It is also worth noting that the tax year runs from the 6th of April to the 5th of April so if you started working self-employed on or after the 6/4/2019 you are in the 2019/20 tax year which ends 5/4/2020.
Base Year
The easiest base year to use is the same as the tax year. Even if that means a short first year.
Tax Overview
Unlike employed people, the self-employed have to keep a provision aside for their Income Tax and National Insurance.
Income Tax is 20% of all profits after the personal allowance which is currently £12,500 in 19/20 tax year.
The self-employed also pay Class 2 National Insurance at £3.00 per week unless profits do not exceed £6,365 per year in which case an exemption will apply. Claiming exemption from National Insurance contributions may have a negative effect on your entitlement to state pension and you still have the option to pay Class 2 voluntarily.
If profits exceed £8,632 (in the 2019/20 tax year) then Class 4 National Insurance also applies at 9% of profits over £8,632.
Please note that thresholds for paying National Insurance and Income tax and National Insurance rates do tend to change in every annual budget.
Record Keeping
There are various ways to keep your records with the cheapest being spreadsheets but the government are pushing businesses to digitise all of their records and use cloud based software such as Quickbooks or Xero which you pay for with a monthly subscription. Quickbooks self employed is a good and cheap start up option in my experience.
Traditional accounting means that the date of your sales and expenses invoices determine the date of sale. This can throw up issues for you, for example you would have to record and pay tax on work you have done even if you haven’t been paid for it by the last day of the tax year.
If your total sales are less than £150,000 in a year then you can use cash accounting. In it’s simplest form this could simply mean downloading your bank statements to a csv file and analysing all of the transactions into sales and expenses. However, you would have to take out any non-business costs including a percentage of or all of any petrol if you are going to use mileage instead.
You can claim simplified expenses for some costs. See https://www.gov.uk/simpler-income-tax-simplified-expenses. This site also includes a checker which shows whether simplified expenses gives a better result that actual expenses.
How to fill out my tax return
Now that you’ve prepared your income and expenses you have all of the information to complete your tax return. The form is available on your personal tax account along with step by step instructions how to complete it.
Make sure you retain a copy of your submission receipt as proof once the tax return has been submitted.
When do I pay my tax
The deadline for paying the tax is 31st January. So for the 2019/20 tax year, the tax must be paid by 31/01/2021.
If the tax charge comes to over £1,000 you will also be required to make payments on account for the following tax year.
For example if you have to pay £2,000 tax on 31/01/2021 for the 2019/20 tax year you will also have to pay half again for the 2020/21 tax year ie £3,000 in total payable on 31/01/2021.
The second payment on account £1,000 towards the 2020/21 tax year will be made on 31/07/2021.
Assuming your profits for the 2020/21 tax year are £2,000, then come 31/01/2022 you will have paid all of your tax for that year and only have to make your payments on account for 2021/22 ie £1,000 on 31/01/2022 and £1,000 on 31/07/2022.
Tax rebates
If you made a loss in your first year of trading you may be able to offset that against tax paid when you were employed in a previous year.
Don’t forget to enter your bank details on the form in case you get a tax rebate!
For more help …
https://www.gov.uk/self-assessment-tax-returns/get-help
What Now?
Still find taxes a complete and utter nightmare? Have no fear! We’re always here to help you gain the clarity you need to help you feel in control. Just get in touch on monica@thefishbourneaccountant.com or call 01243 931457 or 07707568549. You can also contact using the contact form here.