Tax Basics When You’re Self Employed

ad collaborative post // Whether you’re earning a bit through a side hustle or running a full time business, you should be registered with HMRC and declare your earnings. This is regardless of how much you’re earning. If you’re below the tax threshold you won’t pay any tax anyway, so you might as well get registered and stay legal.

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Aside from that, the other business tasks to take care of include monitoring your income and expenses and keeping your records straight.

Don’t worry. It’s not hard.

Register with HMRC

Registering with HMRC for Self Assessment is quick and easy online. On their website, you can create a Government Gateway account which gives you access to all of HMRC online tools via the Self Assessment portal. Your Gateway details are posted via traditional mail, and once received you have 90 days to login for the first time.

You’ll have to supply some basic details, such as the type of work you’re doing and your contact information. You can also choose a business name if you want, but many sole traders just use their own names.

When you need to keep business records

As soon as you start earning money other than wages from an employer, you need to keep some business records. This doesn’t necessarily mean complex software or extensive spreadsheets. The records just have to include what you earn, what you spend, when everything happened, and any supporting evidence such as receipts and invoices.

What you need to record

It’s easy to set up your own simple bookkeeping system that will let you track everything you need for your tax return and personal records. You can use a notebook, an excel spreadsheet or sign up for an online accounting subscription. Each will work in a similar way, letting you record and track income and expense.

Here are the basics of a very simple accounting system. You’ll make one column each for:

• Date – the day the transaction happened, either money coming in or going out.
• Goods – what you bought or sold.
• Cost – amount you spent.
• Income – what you earned.
• Balance – money in your account after you’ve added or subtracted the amount in the ‘cost’ or ‘income’ columns. When you start a new month with fresh columns, take the balance figure of the old month and enter it at the top of the balance column on the new month to start you off.

It’s best (and easiest) to have a separate bank account for business finances as this keeps all your personal spending private if you get help from an accountant, and also prevents you having to weed out recurring personal or direct debit expenses in order to keep your business balance accurate.

Tax Years and When to File your Tax Return

The tax year runs from 6^th April to 5^th April the following year, and there are strict deadlines by which you must submit your self-assessment tax return or risk a fine.

The deadline for online submission is 31st of January, and for paper submissions it’s 31^st October before the end of the tax year. There are two ways to send in the tax return, either online or via the post with a physical paper version.

You submit records one year in arrears, so at the end of the tax year for 2020, records for the tax year 2018/19 were submitted.

Paper vs Digital Records

While you must keep records of all business activities, it’s not necessary to hang onto reams of paper these days. Receipts, for instance, can often be scanned or photographed and the digital file kept in place of the paper version. It’s a good tip to scan both back and front of paper records since a lot of important information is often printed on the back.

The same goes for invoices you generate online or on your own computer and send via email. As long as you have the digital form of the document safely tucked away, there’s no need to print everything.

While it saves on physical space and manual filing effort to have digital records, you should still pay attention to placing items in relevant folders where you can find them again, and to securely back up your digital systems. Ideally have a couple of backups, maybe one in the cloud and one on an external hard drive.

When you’re self employed you must keep your business records for at least five years.

Getting help

When you’re earning regularly from self employment you might find you need more complicated bookkeeping, or help in figuring out your tax allowances for capital equipment or expenses.

Accountants can save you money by helping cut your tax bill, and bookkeepers can help you streamline the process as well as taking the daily strain if you find record keeping too time consuming. Here are the main differences between the two professions:

• Personal tax accountants: Extract the information needed for your tax return from your records, then submit the return to HMRC on your behalf, making sure all claims for expenses and allowances are correct. They may also offer business advice if they spot areas where your money could work more efficiently.
• Bookkeepers: Run your books on a daily basis, keeping everything up to date in a system that’s accountant-ready. You can hire full time help, or part time if you prefer.

Both arms of the accountancy profession may work either jointly or independently, and accountants can undertake bookkeeping too.

At first glance, getting legally set up for business and tax feels overwhelming, especially if you need help or advice for VAT. Breaking it down into smaller steps helps. Plus you have the advantage of knowing exactly how your business is doing, and will find it easier to apply for loans when you need them.