Death and taxes – two things which are unavoidable and two things that often involve an accountant. We can’t help you avoid the former, but we can help you with the latter.
Becoming a freelancer comes with all sorts of obstacles. One of the most difficult will be doing your taxes. This can be particularly challenging for a couple of reasons. Firstly, taxes in themselves are complicated, with all sorts of rules and hoops to jump through. Depending on your understanding of the rules you could end up paying much more or less come the end of the year. Secondly, and perhaps most importantly, the chances are taxes will not be your area of expertise.
Whatever work you do, whatever your background, you went freelance because you wanted to market your specific set of skills – not because you wanted to fill in your own tax return. Aside from the complicated task of completing those forms, you’ll also have the added headache of ensuring you have enough money at the end of the year to pay the taxman on time.
Get on top of budgeting
This in itself can be tricky. If you’ve spent your whole life in full time employment, all your taxes will have been taken care of for you. Now you’ll have to make sure you set aside income as you go. This can be difficult. Cashflow can be a massive challenge for any freelancer, especially if some of your clients are slow paying their bills. However, this is something you have to get on top of. Once you fall behind it can be extremely difficult to catch up.
Most freelancers will set up a separate savings account into which they set aside a portion of their income every year. You should start by estimating how much money you’re going to need. To keep your business and domestic finances separate you may consider setting up a business bank account. Many freelancers do this when they expand and set up a corporation. However, it’s also worth doing this even if you’re still operating as a sole trade.
In England and Wales you’ll most likely either be paying the normal rate of income tax – 20% minus your personal allowance or the high rate of 45%. In Scotland, those rates are 19% and 46%. Always remember that the higher rates only apply once you pass a certain threshold.
You can get more information about the current thresholds and the basic rules via the government’s self-assessment pages.
Expenses
One of the advantages of freelancing is that you can claim certain expenses to offset against your final tax bill. This total will be subtracted from your total end of year turnover and used to calculate your taxable profit.
Expenses generally include anything which is necessary for work such as travel expenses, buying equipment and renting an office. If you work from home, you can include a room in your house which means you can claim a certain amount of your rent and possibly utility bills. If you’re at home working you can expect to pay more in electricity and heating, so these could reasonably be claimed to be part of your work expenses.
In most cases, you will not need to provide proof of these expenses, but you should still keep records for five years after the tax year in case HMRC decides to look into your tax affairs. To ensure you keep on top of everything, its worth keeping a running total of expenses, alongside income to ensure everything has been properly accounted for.
Getting started
When you start out as a freelancer, you’ll need to inform HMRC straight away, even if you are still also doing a full time job. While any work done while in employment will be counted under PAYE, you will still have to declare all income earned from self-employment. You should register as self employed and enrol for national insurance contributions. You’ll pay these regularly as you go.
The latest you can register with HMRC is October 5th after the end of the tax year in which you become self employed. The tax year runs from April 6th to April 5th the following year and if you register late you could be liable to certain penalties. So for example if you started a business in July 2020 you’d have to register with HMRC by October 5th 2020. You can do this on the HMRC website.
Making tax digital
Both new and experienced freelancers will also shortly have to get to grips with digital technology. As things stand you can choose to file your taxes online or to do so by paper. However, the government is in the process of phasing this out with making tax digital. Under these new rules all records must be digital and accounts submitted by MTD compliant software.
You can choose from a number of accounting software such as Xero and FreeAgent. These can simplify the process making it easier to record income, expenses and to submit your accounts at the end of the year. These often include a number of automated features designed to take some of the hard graft out of doing your taxes – great for anyone who would rather be doing the job they are trained for and earning money than doing their paperwork.
Penalties
Once you submit your forms you have to make sure you hit the payment deadlines. For those submitting online, the deadline that will be front and centre of your mind will be 31st January. This is not only when you have to submit your tax return, but also when you have to pay up.
If you miss this deadline you’ll have to pay a number of penalties:
- For missing the deadline: £100
- Late payment: £10 for every day you’re late up to a maximum of £900.
- Interest: You’ll have to pay interest for every 30 days you’re late.
It pays, therefore, to keep on top of your taxes – not least because things get expensive if you fall behind. To help you out therefore, it might be worth paying an accountant. They can do your taxes for you, making sure you hit those deadlines and claim for everything you’re entitled to. Although an accountant comes with a cost, many of them will make this up through their expertise and by freeing you up to concentrate on what you do best – earning money.
