For many of us, nothing looms larger than the shadow of the dreaded self assessment deadline. This behemoth rears its ugly head at the close of your financial year – but it can lurk in the shadows all year long.
The good news is that self-assessment doesn’t have to be daunting. Having even a basic understanding of how self employment tax works will eliminate a huge chunk of your worries.
In this post, we’ll shed light on some of the most frequently asked questions surrounding taxes for the self-employed.
How Much Income Will I Be Taxed On?
You only pay income tax on your profits – not your gross annual income.
Additionally, you’re still entitled to the same personal allowance as those in employment.
Remember – if you’re currently employed (even if it’s just part-time) alongside running your own business, your personal allowance will be used against your employment income first.
The good news is you’re only taxed on your profits. Most salaried employees are paying out expenses AFTER they’ve been taxed, – so you’re actually coming out on top.
TOP TIP: To find out what qualifies as business expenditure, check out this list of HMRC-approved expense categories.
What Is My Gross Income?
It’s pretty simple, really: anything you’ve invoiced a customer for (provided you received the payment, of course) counts as your income.
Make sure you’re using a recorded invoice/receipt system (like Dext) for every single transaction. As retro as the old box of receipts might seem, logging your transactions digitally will save you (or your bookkeeper) a lot of time and hassle – especially as MTD takes effect.
How Can I Calculate My Profits?
Again, there’s no magic formula here. It’s all pretty basic maths.
1. Add up your total income (here’s where those invoices come in handy)
2. Add up your expenses (if you want more guidance on what you claim, check out our blog post on the topic)
3. Deduct expenses from income
And voila! You’ve got your profit figures.
Remember, if your revenue from your business is your only source of income, you won’t pay tax on the first £12,570.
How Can I Budget For Income Tax?
For PAYE employees, their boss will shoulder the responsibility for income tax.
Being self-employed means you are the boss (and the employee too).
To avoid getting caught when the taxman comes knocking, you should set aside a percentage of each sale as you go along.
A safe ballpark figure to slice from each win is 30%. Put this money directly into a separate account and, in the words of Gandalf, “Keep it secret – keep it safe”.
This nest egg is your Ring of Power when December rolls around, and will ensure you can meet the tax deadline with confidence.
TOP TIP: Besides income tax, there are other payments you may need to make to HMRC – depending on how much you’ve earned that year. Use this calculator to get a rough idea of how much you might be liable for come April.
How Do I File My Self Assessment?
Completing a self-assessment is arguably the most stressful part of self-employment taxes.
It’s fair to say that even the most savvy small business owners struggle to file on time. In fact, over a million people missed the 2022 deadline for submitting their returns.
With stats like these, it’s no wonder many people outsource this unsavoury task to accountants. But if you’re keen to handle it on your own, read on for experts tips on staying ahead of deadlines and filing your return on time.
If you’re newly self-employed:
If this is your first foray into the wonderful world of entrepreneurship, you’ll need to register as self-employed with HMRC. Once you’ve done so, you’ll receive a letter within 10 days with your UTR (Unique Taxpayer Reference). You’ll receive a second letter with your activation code . As soon as you get these numbers, you’ll all set to file online.
TOP TIP: Whatever you do, do NOT lose these details. Getting a new one can be a massive headache and, if left too late, can mean you’ll miss the deadline. Take a snapshot and save it to your phone instead of jotting it down on paper.
If you’re already registered:
Dig out that UTR (the one you wrote down). Login to your online account with HMRC. You’ll be sent another activation code. After that, it’s just a question of inputting all the data you’ve been collecting throughout the year.
TOP TIP: If you’re planning on changing industries or business models, you’ll need to re-register your self-employment. Fill out a CWF1 form online using your original UTR (you’ll need another activation code to do this, so make sure you leave yourself enough time).
When Do I Need To File My Self Assessment?
When it comes to self-assessment, the sooner you file, the better.
As we’ve established, the process isn’t as straightforward as it seems. The bigger your time buffer, the lower your stress levels will be.
The deadline for paying your tax bill (plus your first amount for the following year) is the 31st of January. However, you can file your assessment from the day after the tax year ends – typically the 5th of April.
While you won’t have to actually pay anything until January the following year, filing early means you’ll have a clear projection of the amount you’ll owe. This gives you the rest of the year to budget accordingly.
TOP TIP: If you’re filing early, remember that HMRC will calculate the amount you owe based on the figures you’ve provided. If you end up overpaying, HMRC will notify you and refund you the difference relatively quickly. You can bank the extra cash, put it towards the following year’s tax, or treat yourself to a buying spree.
Should I Outsource My Tax Return?
Millions of people file their Self Assessment every year. It’s a time consuming process, but one that’s fully possible to do yourself.
There are lots of things we’re all perfectly capable of doing, yet choose to outsource. For example, we could make a coffee at home, but picking one up on the way to work is easier (plus, they have all those extra milk options). We could argue with our partners about emptying the rubbish, but paying a reliable cleaner to sort it means our bins will be out on the curb the night before collection day.
We make these choices based on how much effort and time doing it ourselves will cost us, versus how much money we’ll spend offloading it to someone else.
Want Some Help With That?
Is the minutiae of activation codes, online forms and deadlines draining time you’d rather devote to your business?
With our CORE plan add-ons (including Self Assessment, Payroll, and Credit Control), you can hand over the tasks you’d rather do without, and start focusing on what you love.