When you’re self-employed, tax is an important thing to get your head around. Whilst it might seem boring, complicated and more hassle than it’s worth, it’s something that we all have to get on board with. If you don’t pay on time, there are penalties; if you don’t know what you’re doing, there are lots of places where you might trip up.
But it doesn’t have to be this way. At TaxScouts, we firmly believe that doing a tax return should be simple, quick and, most importantly, hassle-free. So here are 9 hacks for freelancers to make that happen.
1. Get to know the key dates
One of the most important ways to stay organised is to know when in the year HMRC expects you to take action. Here are some key dates to get in the diary:
- 6th April – 5th April – the tax year
- 5th October – the deadline to declare your income (Self Assessment) to HMRC
- 31st January – the deadline to pay your tax return
- 31st July – the deadline to pay the second half of your tax bill (Payment On Account)
2. Spreadsheets, Spreadsheets, Spreadsheets
In case it’s not clear, organisation is key when it comes to keeping your finances in order. And when it comes to your taxes, the need is even greater. There are lots of things to keep on top of, and various ways to do it. But we’d recommend spreadsheets all the way.
Monthly tabs in a spreadsheet for each tax year are a great way to stay on top of everything you’ve earned and spent. That way, pulling all of your documents together to do your tax return won’t be nearly as arduous.
Keeping spreadsheets is also a handy way to keep your records online and not scattered around on small scraps of paper. And this is even more useful if you have more than one stream of income e.g. side gigs alongside a bigger contract role.
3. Become fluent in the language of tax reliefs
Whether you’re employed or self-employed, you’ll be entitled to certain tax reliefs that are useful to be aware of:
- Reduce the tax you and your partner pay with the Marriage Allowance
- Claim back Gift Aid on your donations
- Claim back your mileage
- The Home Office Allowance
4. Keep track of your expenses
Did you know that when you’re self employed, you can deduct your business spend from your income? The rule that HMRC applies is that anything that you spend wholly, exclusively and absolutely on your business can be deducted when it comes to calculating your tax bill. That way, you only pay tax on your profits rather than from your overall income.
Expenses can be anything from:
- Your laptop
- Your work phone
- Accounting costs
- Uniform (e.g. specialist shoes, protective clothing, overalls etc.)
- Equipment (e.g. protein that a personal trainer sells clients, a massage table, electronics, design software for a graphic designer)
- Your website
- Business mileage and travel (not including a regular commute)
As long as you have evidence of your purchase and you can justify it as a sole business expense, you can deduct it from your tax bill. So again, we recommend keeping track of these in your yearly spreadsheet.
5. Do your self assessment early
You know what they say. The early bird catches the worm, right?
Your Self Assessment is basically the process of declaring to HMRC that you’re self-employed and that you’re earning untaxed income.
The sooner you do your Self Assessment, the sooner you’ll get your Unique Taxpayer Reference (UTR) number from HMRC. And the sooner you get this, the quicker you can get your tax bill done, dusted and out of your hair.
The process is pretty simple. You just head over to HMRC before 5th October (after the tax year ends in April), fill in your details about your income sources and then around 10 working days later, HMRC will send you your UTR number.
You’ll then use your UTR number to pay your tax bill in January.
6. Get to know how Income Tax works
Income Tax is the tax that you owe on your earnings. It’s calculated based on how much you earn and, as you can imagine, the more you earn, the more Income Tax you pay.
The rates of Income Tax often change with each new tax year. The change is announced in the Autumn Budget the year previously. Below, we’ve laid out the Income Tax rates for the 2020/21 tax year:
|Up to £12,500||0%||Personal allowance|
|£12,501 to £50,000||20%||Basic rate|
|£50,000 to £150,000||40%||Higher rate|
|over £150,000||45%||Additional rate|
7. Keep 30% of your income aside for taxes
With the above in mind, you should try to prepare for your tax bill from the earliest point possible. Being self-employed is not like being salaried, and so living from paycheck to paycheck is a very risky strategy.
When you earn less than £50,000 per year, you’ll be taxed Income Tax at 20%; if you earn over £50,000 per year, you’re taxed at 40%. It’s therefore wise to set aside 30% of your monthly income to cover your taxes. That way, you’ll be in a good position by 31st January to pay your tax bill without being floored by any unfortunate surprises.
8. Consider contribution Class 1 National Insurance
National Insurance is another type of tax that you need to pay on your tax return. It entitles you to certain state-provided benefits such as the state pension, the Maternity Allowance, the Disability Living Allowance and more.
But as a freelancer, you’re only liable to pay two types of it:
- Class 2 National Insurance – a flat rate of £159 per year when you earn more than £6,475 a year
- Class 4 National Insurance – 9% of your earnings when you earn more than £9,501 per year
With everything we’ve seen in the pandemic and how vulnerable you can become as a freelancer without employment support, it might be worth considering contributing voluntarily to Class 1 National Insurance. It makes you eligible for the Job Seeker’s Allowance which, otherwise, you’re not entitled to claim.
9. Expect the best, prepare for the worst
Like we said at the start, preparation is key. And we have three bits of advice to leave you with:
- Don’t leave everything to the last minute. That’s exactly what causes everyone to find tax stressful.
- Calculate the penalties you’ll owe if you file your tax return late. How, you ask? Check out our TaxScouts late penalties calculator, of course.
- Don’t waste your money. Some traditional accountants thrive from the industry being needlessly complex and a space for unsuspecting freelancers to panic-buy their services. But at TaxScouts, we offer a fair, flat fee, and all the support you need.
Sign up today to get paired with your own personal accountant. They’ll answer any questions you might have and guide you through the whole process, step-by-step.