HMRC has recently announced it won’t be issuing late fines for tax returns until 1 March, but it’s still best to file yours as soon as possible – and these tips for self-employed workers could help.
There are an estimated 4.5million self-employed workers in the UK, according to the latest figures from the Office for National Statistics (ONS), making up around four in 10 of the estimated 12.1million tax returns HMRC is expecting to receive this year.
Here are some tips specifically for self-employed workers to help you file your tax return on time and avoid paying more tax than you need to.
1. Check how your accounts are kept
The income you declare on your tax return may change depending on how your accounts are prepared, so make sure you know which option you’ve chosen.
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 you’ll ever recover the money.
2. Factor in working from home…
If you’ve had to work from home due to the coronavirus pandemic, you may be able to claim back some of the extra expenses you’ve had as a result.
These costs can be deducted from your taxable income, which will reduce your profit and therefore your overall tax bill.
It’s possible to claim a flat rate, which purely depends on the hours you work from home each month – gov.uk has more details on this.
If these rates don’t sufficiently cover what you spend, you’ll need to calculate the proportion of what you’ve used solely for business purposes, taking into account the number of hours you work and the space you use for work.
The diagram below shows an example of how this might work:
3. …and any other expenses
Which? research last year found that almost a third of self-assessors weren’t up to speed on which expenses they could claim.
Your expenses will depend on your circumstances, but eligible items and services may include things such as the cost of running and maintaining business premises, money spent on tools, stationery, travel and accommodation for business trips and even training for your staff if you’re an employer.
If you use your personal car to travel for business purposes, 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. However, you can’t claim this for your commute or any personal travel.
If you’ve bought any larger items for your business – such as machinery, for example – you may be able to claim capital allowances.
- Find out more: self-employed tax allowable expenses
4. 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 £12,500 in 2019-20, 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 2019-20 is £12,000. 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 2019-20 is £2,000. 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
5. Double check how much tax you owe
As part of the government’s financial coronavirus measures to help self-employed workers, those who pay tax by payments on account were able to defer the tax that was due on 31 July 2020.
If you chose to do this, however, this tax will now need to be paid by 31 January 2021 – along with a balancing payment for the 2019-20 tax year if it turns out the estimated payments on account didn’t cover the amount of tax you actually owe. This will be calculated once you’ve submitted your 2019-20 tax return.
This means your tax bill at the end of the month may be significantly more than usual – the earlier you can find out and plan for it, the better.
6. Don’t forget about the 2020-21 tax that’s due
Payments on account for the 2020-21 tax year will also begin on 31 January 2021; the amount you’ll owe will depend on your 2019-20 income.
The first instalment of your estimated 2020-21 tax is due on 31 January 2021, and the second is due on 31 July 2021.
- Find out more: what is payment on account?
7. Should you register for VAT?
Smaller businesses with a turnover of less than £85,000 can choose whether or not they want to register for VAT voluntarily.
If you register, there’s the advantage of being able to claim back the VAT spent on things you buy for your business – but you’ll also have to charge your customers VAT for the goods and services you provide.
Making Tax Digital – HMRC’s digital tax system, which aims to make it easier to submit your figures and cut down on the number of reporting errors – is now in force for VAT. This means you should keep digital VAT records, and submit your quarterly VAT return to HMRC using compatible software.
- Find out more: self-employed VAT return
8. Apply for help if you can’t pay your bill
If the coronavirus pandemic has meant you’re unable to pay the tax that’s due on 31 January 2021, you may be able to set up a Time to Pay arrangement with HMRC.
This allows you to split what you owe into 12 smaller installments, to be paid until 31 January 2022.
To apply for this, you must:
- owe less than £30,000 in tax;
- be signed up to gov.uk and have a government gateway ID;
- have filed your 2019-20 tax return and know how much tax you owe;
- not have any other tax outstanding to HMRC.
If you owe more than £30,000, or need more than 12 months to pay, you may be able to get a different instalment plan by calling the Payment Support Service on 0300 200 3835.
9. File your records carefully
Whether you keep your records digitally or on paper, it’s important to make sure all the information you’ve included in your tax return is kept in an ordered way in case HMRC asks for any evidence.
Self-employed workers must keep their records for at least five years after the 31 January submission deadline – so, anything related to your 2019-20 tax return must be kept until at least 31 January 2026.
- Find out more: how to file a self-employed tax return
10. Consider using the Which? tax calculator
If you haven’t yet filed your 2019-20 tax return, the Which? tax calculator is an easy to use online tool that may be able to help.
Not only is it totally jargon-free, but the tool allows you to tot up your tax bill and even suggests allowances and expenses you may have missed.
You can declare income from a range of sources – in addition to self-employed income, it also covers income from property, pensions, trust, dividends, capital gains and employment.
When you’re ready to file, it can also send your return directly to HMRC.