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Tips for filling out your tax return when you're self employed

10th January 2019

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Financial journalist Rachael Revesz gives her advice on filling out a tax return as a freelancer, contractor or someone who is self-employed.

We’ve all heard the old adage about the only certainties in life being death and taxes. It sounds a bit miserable. But if you record your income and your expenses as you go, and make your spreadsheet as colourful as possible, it doesn’t have to be a major headache.

Taxes, like everything else, are a learning curve – especially when you’re a contractor, self-employed or you’ve set up your own business. When it came to filling out my first self-assessment tax return nice and early last year I smugly thought I’d done a good job with it. But actually, it’s the same thing as when I handed in my first university essay two weeks before the deadline and was told to re-write it: being early isn’t the same thing as doing it properly.

Here’s what I wish I’d done the first time round:

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Understand your tax bracket

After your personal allowance – £11,500 for the 2017/18 tax year, and increasing to £11,850 the year after – you start paying 20% income tax on the rest of your earnings. You will pay 40% tax on anything you earn over £45,000, and 45% for earnings over £150,000. These amounts are changing for 2018/19, and can change as often as every year, depending on what the government decides.

These thresholds are called tax brackets, and it does not mean you pay 40%, for example, on all of your income. It sounds obvious but it’s a common mistake. You can estimate how much tax you will pay with this handy calculator.

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Set aside at least 30% of your income

Freelancers, the self employed and contractors tend to be cautious creatures, not least because we don’t have a stable or guaranteed income, so it makes sense to set aside more than the bare minimum. And a good idea is to keep your tax money in a separate bank account, so you’re not tempted to dip into it. If you’re a Starling customer, the Goals feature allows you to put aside money for this purpose, separate from your everyday balance.

You will also pay for National Insurance (Class 2 or Class 4) depending on how much profit you make (find out more info on the Gov.uk website). For student loans, how much of the loan you pay back each month or year also depends on your earnings - see the breakdown on the Student Loan Repayment website.

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Student loans

If you’re receiving a salary, you automatically start paying your student loan back via HMRC every month - 9% of your pay once you pass the threshold of earning £352 a week or £1,527 a month. But if you’re freelance, you have to remember to put this money aside yourself.

Mark Dobson, chartered accountant and director at Arcata Chartered Accounts, says: "People often don't fill out the correct part of the form for student loans and as a result the deductions for the loan aren't taken. HMRC is quick to identify this."

Paying back the loan through your tax return can also take a while to process. Even if you file your first tax return in April - which is super early - and pay more tax in January, your student loan balance will remain unchanged until the following April, or it will even have gone up with interest.

However, when the next April rolls around, HMRC will communicate with the Student Loans Company and your balance and interest should be sorted out. (I phoned them to ask about mine, so trust me on that.) It’s just a pain it can’t be done sooner – with any other loan we would be able to check our up-to-date balance whenever we wanted.

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Expenses

If you’re self-employed, you can claim expenses for many different things, and offset it against the amount that you pay taxes on. For example, if I earn £25,000 after my personal allowance and have £5,000 worth of allowable expenses, my taxable income would be £20,000.

Expenses cover things such as petrol, stationery, printing and even a proportion of your rent and bills, if you work from home, as well as hotel bills if you are travelling for a work trip. There is sometimes no exact science to calculating your allowable expenses – but if you get audited, the trick is to be able to show how you calculated them, and prove that the figures are within reason.

"It’s common to see people putting through incorrect expenses,” says Mark. “That's an area that ideally involves an accountant as the rules are complex, especially for freelancers, regarding things like travelling between home and work and the use of home as an office. The rules about what counts as an expense are always evolving from new case law."

There are definite no-nos, such as food, clothing, or entertaining your clients at a fancy restaurant. A nice little three-minute HMRC video is here. And keep your receipts!

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Don’t forget your P60 form

The gig economy means we are likely to do more than one job, and some of them might be remunerated via Pay As You Earn (PAYE). If you have a PAYE job, you might also be contributing tax and paying into your pension.

At the end of the tax year, get your P60 from each of your PAYE jobs so you can see the breakdown. When you fill out your tax return, the HMRC system allows you to enter the total amount of earnings and tax you’ve paid, specifically for PAYE and non-PAYE jobs.

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File on time

Every year there will be plenty of self-employed people running around like headless chickens at 11pm on 31 January. If you do miss the deadline, you will be fined at least £100, depending on how late you file. "If you're doing it yourself you need to be proactive, especially in the run up to Christmas. People often put it to the back of their minds and just think they will do it in January,” said Dobson. “We frequently have new clients late in January requesting us to complete their self assessments!"

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Calling all landlords

Mark has some wise advice here. If you have a rental property, you need to register for self assessment and disclose any income you make on it and expenses - even if the property is loss making. “HMRC, through the ‘Let Property Campaign’, are identifying landlords where they have not disclosed their rental income,” he said. “This is resulting in an investigation and recovery of the tax due plus penalties.”

If you simply can’t bear any of this, hire an accountant. You can expect to pay as little as £100 to £200, if it’s an easy end-of-year job. Accounting software such as Xero is integrated with Starling technology, making that admin task even easier.

As we approach the next tax deadline, please learn from my mistakes. Also, filing on time saves you money and can make you feel a little smug. It’s definitely worth it.

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