Self-assessment tax warning with simple tips to avoid HMRC fines | Personal Finance | Finance

July isn’t only important because of the impending General Election. For freelancers and self-employed workers in the UK, it’s the time to settle their Payments on Account for the tax year.

But this might not be the case much longer – Making Tax Digital is set to roll out to self-employed freelancers in the next few years. The MoneyMagpie team has their fair share of freelance experience, so we thought it was time to reveal our tips for freelance tax management.

Be Prepared

Our first tip is the most straightforward: be prepared. Make sure you know which taxes you’re registered for and when they are due throughout the year.

Limited companies are required to pay Corporation Tax, while any Ltd or sole trader with a turnover above £85,000 a year must register for VAT. If your turnover is below that you might still benefit from being registered (especially if you are near the threshold).

If you’re a sole trader, you’ll need to pay Income Tax every year as well as your National Insurance contributions. And be aware: the one that catches people out the most is Payments on Account.

What Are Payments on Account?

Every January, you need to submit your self assessment tax return for the previous tax year. (You can do so any time from April, and we suggest you do it earlier rather than later!).

If your profits mean your tax bill is going to be over £1,000, you’ve met the Payments on Account threshold.

This means that, not only do you have to pay last year’s tax bill, you also need to pay 50 percent of the estimated current year’s tax bill. So, if your self assessment says you need to pay £2,000 for last year, your actual bill will be £3,000. Then, in July, you’ll pay another £1,000 to take your total paid for two years to £4,000.

The system is supposed to help freelancers manage their tax payments. In reality, it does not take into account the fluctuating income of the self-employed very well. You can opt out of PoA or reduce them by saying you think you’ll earn less in the current tax year than the last. But if you end up earning more than your estimate, you’ll owe the tax plus interest on the difference.

The July payment is supposed to help level out your tax bill so that, come January, you’re effectively paid up for the current year and paying an advance portion for the next year. This will all change with Making Tax Digital.

Making Tax Digital for Freelancers

A slow rollout of Making Tax Digital for businesses has put it into the background for many. But in the next two years (or so, based on the delays so far), freelancers will need to adhere to the new system, too.

This means quarterly reporting of income and expenses, using approved software such as Quickbooks, Sage, or FreeAgent. In theory, this will make it easier to have a real-time overview of your tax bill and avoid having to find huge lump sums twice a year.

The automation of the submissions using software should make the process fairly straightforward with just a few clicks. But this means freelancers who currently go by the receipts-in-a-shoebox and notebook method will be left behind as they learn how to do their accounts.

Of course, accountants are gearing up for this change too, so if you want to continue the way you are then you can send the details to your accountant to submit on your behalf. This will, however, raise your annual accounting bills as it will be a quarterly endeavour instead of the January self-assessment rush.

Keep Accurate Records

While stuffing your car glovebox with receipts might be an easy way to push aside your accounting responsibilities, spending half an hour each week to settle your accounts will pay off in the long term.

Lots of business bank accounts now offer free or discounted access to integrated accounting software, making it easy to track and label income and expenses. This makes it easy to produce a report by tax time as well as help predict your potential tax bill.

If you don’t have a business bank account or want to keep your data offline, a basic spreadsheet will suffice to make tracking expenses easy. Keep a record of what you spend, where, and what the purpose is (utilities, business expense, equipment or travel etc) as this will make it easy to split the expenses into categories for your self assessment.

Put a calendar note in your diary every week and treat it like you would a client meeting. Turn up on time, every week, and spend even just fifteen minutes to update your latest income and expenses.

Check What You Can Claim as An Expense

You might be surprised at what is – and isn’t – allowed as an expense on your tax return. The allowances differ slightly between sole trader and Limited companies.

Expenses are important to keep track of as they can reduce your tax bill rather significantly. Common expenses include broadband, sub contractor fees, professional fees (such as for your accountant!), membership of professional bodies, and day-to-day running costs such as stationery and postage.

You usually can’t claim for clothes unless you’re an actor or performer, or you wear a specific uniform for your job.

Set Reminders

It’s so easy to let the year slide by as you get stuck into your business activities. Don’t let the tax deadlines sneak up on you – make sure you set reminders in your calendar six weeks, four weeks, and two weeks before each one. This will make sure you’re never hit with a late filing fee.

Have the Freelance vs Ltd Company Chat

For freelancers starting out or earning under the median UK wage, it is usually more tax efficient to be a sole trader. However, there are several advantages to incorporating a Limited Company especially when your turnover increases – but it can come with running costs. These are offset, however, by being able to increase tax efficiency with pension payments and similar tricks.

Many accounting firms will offer a free fifteen minute consultation to help you decide whether you need their services, and if it is best to be a Ltd company or sole trader based on your circumstances. Make the most of a free consult – or pay a small fee for a longer appointment – and you could save tens of thousands of pounds in the coming years with some professional advice.

Stay Ahead of the Tax Game

With a General Election on the near horizon, it’s possible that everything could change for freelancers and Limited company directors in the future. As with anything, taxes are a big part of any budget, and the self-employed are often the last to benefit and first to suffer.

You can stay ahead of the game in tax surprises by always keeping an eye on each budget announcement, and signing up to money advice newsletters to make sure you’re up to date on the latest announcements. Tax changes often (not always!) take a long time to take effect, so being notified as soon as possible gives you plenty of time to plan for the future.