Self-employment has many benefits but also carries responsibilities such as reporting your income to HMRC each year so that you can pay tax.
First the good news. Everyone who works has a personal ‘tax allowance’ which is the amount you can earn before you pay any tax. The current pre-tax rate for 2018-8 is £11,850. But here’s the thing, even if you earn under this amount you still need to register with HMRC and submit a yearly tax return.
Basically, if you earn more than £1,000 a year from your business then you need to register as self-employed and submit a tax return.
So how do you get started? And is it complicated? Do you need an accountant? So many questions!
If your business is small and your financial processes pretty straightforward it’s probably easier and cheaper to do your self-assessment tax return yourself.
First up, you need to register with HMRC and grab yourself a Government Gateway account.
You can register online with HMRC here.
Once you’re registered you’ll be enrolled for the self-assessment tax service and be sent a letter with your 10-digit Unique Taxpayer Reference (UTR). Keep this somewhere safe, you’ll need it pretty much every time you deal with HMRC in the future.
You’ll also get a letter within 10 working days (21 days if you live abroad) with an activation code. You’ll need this when you first log in to your online account.
HMRC will send you notifications about what you need to to and when.
Business Income v Taxable Profit
I have more good news (and you thought this article would be depressing!) You don’t pay tax on everything you earn in your business. Your business has both running costs and expenses and HMRC allows you to offset many of these against your total income. Hurray!
Basically, let’s say that during the 2017-18 tax year your business made £18,000
But… you spent £5,000 on allowable expenses
You only pay tax on the remaining £13,000
What are allowable expenses?
HMRC has a handy list you can check here. It says you can offset money spent on:
This includes office rental costs, stationery, phone bills, broadband bills, postage, printer ink and computer software (like DropBox, Hootsuite Pro or Screencast-o-matic).
Fuel, train or bus fares, plus any parking charges spent on travel to meetings with clients or suppliers, networking events, training events etc. If you have a vehicle that you use just for your business, like a delivery van you can also offset your insurance, breakdown cover and any repair costs.
If you need to buy uniforms for you and your staff or special clothing equipment (e.g. if you’re a cake maker you might need aprons, oven gloves, hairnets etc) you can offset the cost of these.
If you employ someone to work for you then you can offset their salary against your taxable profit. If you use a another self-employed mum to do tasks for you (such as admin or social media management) you can also offset these costs.
Things you buy to sell on
This includes your stock or the raw materials you use to make your products (e.g. if you’re a card maker you can offset your card, decorative paper, stickers etc)
This includes your insurance and any bank charges, plus any money spent on accountants or solicitors.
Costs related to your business premises
This covers your heating, lighting and any business rates you pay. You can claim a proportion for this even if you work from home and particularly if you have a dedicated space like a home office or craft room
Advertising and Marketing
This covers any costs associated with your website (hosting, paid plugins etc), your business cards, flyers, catalogues, adverts, banners etc. Also networking events and membership of any professional bodies for your industry.
Keep a record of all expenses incurred in your business along with copies of receipts, invoices etc. You don’t need to send these in with your tax return, but you would need them if HMRC ever decided to to do a compliance check on your business. This is pretty rare with a small business but can happen so it’s always best to be prepared.
What if i make a mistake on my tax return?
First, don’t panic. Mistakes happen and the HMRC police aren’t going to bash in your door and cart you off to the mummies wing of your local lock up! There are several ways to make changes to your tax return and they’re all outlined here.
If you’re really stuck or worried the best thing to do is to call the HMRC tax helpline: 0300 200 3310
What if I forget to submit my tax return
Chances are you’ll get a fine. This is £100 if your tax return is up to 3 months late, more if you’re later. So, get it in ASAP. You can appeal against a late penalty if you feel you have a good excuse. Reasonable excuses include a death in the family, an unexpected hospital stay that prevented you from filing your tax return or computer or software failure. You may have to provide proof to back up your appeal.
You can find information on the appeal process here.
Sounds complicated, can’t I just hire an accountant?
Of course! If your tax return is just too much of a headache then you can hire an accountant to take care of it for you. You’ll probably need to fork out a few hundred pounds but if you feel the cost is worth the calm it brings then go for it.
You can find a registered accountant via:
- ICAEW (The Institute of Chartered Accountants in England and Wales)
- ACCA (The Association of Chartered Certified Accountants)
- Chartered Institute of Taxation
- The Institute of Financial Accountants (IFA)
If you’re on a low income and need specialist tax help you can contact:
What if I can’t pay my tax bill?
Don’t bury your head in the sand. The problem will not go away and the consequences can be severe, including fines and in (very severe cases) imprisonment. But remember, unless there’s clear fraudulent behaviour on your part most problems can be sorted out with the HMRC team. They’re not monsters, in fact, my own experiences with HMRC have mostly been very positive.
As long as you don’t count the amount of time I’m on hold…
But seriously, If you owe HMRC money contact the Business Debtline who can help you with debt.
Even if they’ve made a decision already, you have the right to challenge HMRC decisions about your tax affairs; you generally have 30 days in which to do this so make sure you act quickly.
Note: If you ever find yourself in a criminal investigation with HMRC, or know that you’ve acted fraudulently in any way, you should seek the help of a suitable legal professional who deals with business regulation and compliance; you can find one via the Law Society website.
So you see, tax doesn’t have to be all terrible. Keep records and make sure they’re up to date, file on time. That’s about it! And once you get used to it, you’ll breeze through your yearly return.