With less than a week to go until the 31 January deadline, thousands of freelancers and self-employed workers will be rushing to complete their self-assessment tax returns. But are you up to speed with all of the latest self-employed tax rules?
According to the latest figures, self-employed workers now make up more than one in seven UK workers – and it’s a career choice that’s on the rise.
As such, it also means more and more people will need to complete tax returns each year – and at HMRC’s last count on Friday 24 January, more than three million people are yet to file.
Here, we’ve picked out some top tips to help you file on time and make sure you don’t pay more tax than you need to.
1. Make sure you know how your accounts are kept
Before you start filling out your self-assessment tax return, make sure you know whether your accounts are prepared using the cash basis or the accruals basis.
This is most commonly used by small unincorporated businesses (must have a turnover of £150,000 or less), sole traders and partnerships, and allows you to only report any money you’ve paid or received during your accounting period.
You don’t need to include any money you’re owed, or are due to spend, if the transactions didn’t take place during the year.
Under the accruals basis, you must include receipts and expenses that were due during the accountancy year – regardless of whether the money was actually paid or received.
However, there is the advantage of being able to claim expenses that were due – even if they’re unpaid – and you can also write off bad debts if it’s unlikely that you’ll ever recover the money.
2. Include your expenses
Recent Which? research found that a worrying number of people didn’t know which expenses they could include on their tax return, so could mean many are paying more tax than they need to – or claiming for expenses they’re not eligible for.
As a self-employed person, you’ll pay tax on your profits, rather than your income. That’s why it’s important to deduct the costs of running your business from your taxable income, which will reduce your profit and therefore your tax bill.
You can claim expenses for things such as heating, rent and cleaning for business premises, travel and accommodation for business trips, and even training for your staff.
- Find out more: self-employed tax allowable expenses
3. Even include the expenses you’ve incurred at home
If you work from home, you can claim a proportional amount for things such as heating, electricity and lighting, depending on how much is actually used for work.
You’ll need to consider how much of your home is used for work, as well as how long it’s used for.
The diagram below shows how this might work:
4. Also include expenses for your car
If you use your personal car to travel for business, it’s possible to claim tax relief using a flat rate for each mile you drive:
- 45p per mile up to 10,000 miles
- 25p per mile for anything over 10,000 miles.
This doesn’t apply to your commute or for any personal travel.
5. Claim for capital expenditure
As part of growing your business, there are a few things you might pay for that will qualify for tax relief (as they’re solely for business purposes), but can’t be filed as part of your expenses.
Business investments, such as buying computers and machinery, could instead be covered by the Annual Investment Allowance (AIA).
The AIA rules mean you can claim relief on up to £200,000 investment for 2018-19 – a figure which is unchanged for 2019-20.
For example, if you spend £20,000 on machinery for your business in 2018-19, and had a taxable profit of £100,000, the AIA means you’d only need to pay tax on the difference – in this case, £80,000.
Bear in mind that your relief can’t be more than the tax you owe.
- Find out more: self-employed capital allowances
6. Get your tax allowances right
When you’re trying to work out how much tax you owe, you’ll need to know the 2018-19 tax allowances that might apply to your income, as most people aren’t charged tax on everything they earn.
- Personal allowance: the personal allowance was £11,850 in 2018-19, unless you earned more than £100,000, in which case you lose £1 of personal allowance for every £2 earned.
- Capital gains tax allowance: if you have capital gains to declare, the allowance for 2018-19 is £11,700. Above this, what you pay again depends on your income tax band; basic-rate taxpayers are charged 10% capital gains tax (CGT) on assets and 18% on property, whereas higher or additional-rate taxpayers have to pay 20% on assets and 28% on property.
- Dividend tax allowance: the dividend allowance for 2018-19 is £2,000, down from £5,000 in 2017-18. The tax you pay above this threshold depends on your income tax band – basic-rate taxpayers are charged at 7.5%, while higher-rate taxpayers pay 32.5%, and additional-rate taxpayers pay 38.1%.
You’ll only pay tax on income that exceeds these allowances.
- Find out more: tax-free income and allowances
7. Consider registering for VAT
While larger businesses must be VAT registered, smaller businesses with a turnover of £85,000 or less are given the choice to register voluntarily.
Being VAT registered means you can charge VAT at 20% on the services and products you sell, and you can also claim back the VAT on the things you buy for your business.
It may be worthwhile if you pay a lot of VAT on items bought for your business, but bear in mind that Making Tax Digital came into force for VAT this year, so you must keep digital VAT records and submit your returns to HMRC using compatible software.
- Find out more: self-employed VAT return
8. Think about going digital
The Making Tax Digital plans aren’t just for VAT – the government’s plan is to introduce digital record keeping to income tax, too.
This will directly affect self-employed businesses and landlords. There’s already a voluntary pilot scheme in place, which you can join if you’re a sole trader with an income from more than one business, or if you’re renting out a property in the UK.
It could be a good idea to get used to using digital records now before it becomes mandatory.
9. File away your records carefully
Keeping paperwork such as your receipts, invoices, bank statements and bills in good order can take hours off the time it takes to file your tax return.
If you’re self-employed, you’ll also need to keep your records for at least five years after the 31 January submission deadline – so, for this year’s return, all records should be kept until the end of January 2025.
This is in case HMRC has any queries about your return, or asks for evidence of your figures.
- Find out more: online tax returns
10. Get ready to pay for next year
Many self-employed workers who owe £1,000 or more in tax will have to pay their tax bill using the payment on account system.
This is where you pay an estimate of next year’s tax bill in two instalments – one by 31 July and one by 31 January.
It’s designed to make tax payments more manageable, but it can be problematic in your first year. That’s because when it comes to the 31 January tax deadline, not only do you have to pay tax owing from the previous tax year, you’ll also have to pay half of the projected tax HMRC thinks you will owe in the following tax year.
In subsequent years, 31 January will also be a date when you may have to make a balancing payment – this is when you owe more tax than had been estimated.
You’re not allowed to pay any part of your tax bill on credit card, so you’ll need to make sure you have the funds available.
If you can’t afford to pay your bill, get in touch with HMRC as soon as possible.
- Find out more: paying tax – self-employed
11. File your tax return with Which?
The Which? tax calculator can help you work out your tax bill and submit your return directly to HMRC.
You can use the tool to help work out what you owe, and it will prompt you with tips on any allowances and expenses you might have missed.
Plus, you can use it even if you need to declare income from a range of sources. So in addition to self-employment, you can declare income from property, pensions, trusts, interest, dividends, capital gains and employment.