Starting self-employment is a big step. No longer will you have the luxury of a regular salary and you will also have new responsibilities when it comes to reporting your tax affairs to HMRC. It need not be daunting though as help is available. Here in a checklist of the most important things to know for tax when starting self-employment.
(1) Understand your new responsibilities
As an employee, your employer takes care of your tax calculation for you and tax is regularly deducted from your salary before it even reaches you. It is therefore easy to not really understand how the tax system works as you never needed to.
As a self-employed worker, you are responsible for your tax and you have certain deadlines to adhere to, else interest and penalties may apply.
An accountant can help you to better understand your new tax-related responsibilities, particularly in the first couple of years when you will also be building up your business.
(2) Get a diary for important dates
The tax system is full of important dates and a diary will help you to keep organised and meet deadlines.
If your tax affairs are simple, like that of a freelancer, then you will only have a few important dates to work towards, including:
- 5 April – end of the tax year and usually end of your financial year
- 31 January – date your tax return must be filed with HMRC. Also, your tax payment is due on this date, along with your first Payment on Account
- 31 July – date to pay your second Payment on Account
The government are working towards a new system for tax reporting called Making Tax Digital, which will mean more regular reporting for all self-employed tax-payers.
(3) Get organised with recording income and expenses
The best way to record your income and expenses in self-employment is using cloud accounting software.
Cloud software links to your business bank and saves you significant time in allocating the nature of payments, or on tasks like keeping on top of your debtors.
The important thing is to ensure you get organised with your bookkeeping and don’t leave it to the last minute.
The primary reason for this is that you may miss valuable tax-saving opportunities through the year.
(4) Understand what you can and can’t claim for tax
It may come as a surprise but not everything is claimable for tax relief.
The general rule is that you can claim an expense against your tax if it is wholly and exclusively for business purposes.
It is important to fully understand the expenses that offer tax relief, so you don’t get caught out.
Certain costs, travel being an example, have a number of different rules that could be the difference between whether you can claim, or not.
Work with an accountant to ensure you are claiming correctly.
(5) Take care of your pension
As a self-employed worker you won’t have the usual access to employer pension schemes. It is therefore important to consider your wider retirement plan, even if you are young and think of retirement as being a long time into the future.
A personal pension plan can also offer tax planning advantages, particularly when your profits reach levels close to the higher rate tax bracket.
(6) Save your money tax effectively
In the first few months, or even years of self employment, saving money can be difficult. But any money you are able to put away should be done in a tax efficient way.
Individual Savings Accounts (ISAs) don’t charge tax on the interest you earn, making them a way to at least retain all your earnings and a bit more.
It is vital to at least put away money for your tax bill each month – usually 20 percent of your gross income is a good starting point. A cash ISA can be a way that you can save whilst keeping your money handy in case of an emergency.
Speak to your accountant about other ways to manage your money so it works harder for you.