The freedom of working for yourself comes with certain responsibilities. Compliance is entirely down to you, and there are a number of lesser-known tax rules that frequently catch out first-time taxpayers.
Digging through HMRC’s resources only provides so much support, which is why it pays to fully research your tax obligations ahead of registering as self-employed.
Penalties that are issued for non-compliance, or an unexpected tax bill, can devastate someone who’s self-employed. To avoid these situations, you’ll need to correctly:
- Store records of business income and expenses
- File an annual Self Assessment
- Pay Income Tax and National Insurance
In order to help you understand the above, we’ve provided this all-encompassing guide on becoming self-employed.
What exactly is self-employment?
By definition, being self-employed means working solely for oneself.
Provided your trading income is above £1,000 (as of 2019/20), you’ll need to register your self-employment with HMRC. You will need to do this as soon as possible – no later than 5th October after the end of the tax year in which you first became self-employed.
Assuming you’ve never previously completed a Self Assessment tax return, you’ll receive your 10-digit Unique Taxpayer Reference (UTR) number by post following registration. You’ll need this number to submit your Self Assessment tax return to HMRC. This can take 10 working days to arrive.
You will also need be registered to access HMRC’s online services. HMRC will send you an activation code for this by post. They will then request that you complete a Self Assessment return for the tax year in which you started trading.
It is not advisable to leave it until close to the Self Assessment deadline to register online as HMRC can take a number of weeks before sending your login details.
Do I need to keep records?
Yes. Records are an essential part of preparing your tax return. Without them, HMRC can’t effectively determine your income and expenditure. As a result, your Self Assessment calculations could be incorrect – earning you a possible penalty from HMRC.
It’s worth noting that a sole trader’s Income Tax is based on taxable profits earned through the work you perform and not the amount you ‘pay yourself’.
There’s no default format to record your sole trader income and expenses, however with Making Tax Digital (MTD) expected to affect all self-employed individuals after 2021, you may want to invest in bookkeeping or tax return software to help you get familiar with digital tools ahead of time.
Until then, you’re able to use spreadsheets, manual cash books or annotated bank statements to log your income and expenses. While these aren’t sent to HMRC, they’re used to complete your Self Assessment tax return (and they will need to be shown to HMRC if asked).
Soon, in addition to keeping digital records, your Self Assessments will need to be submitted to HMRC through software capable of linking directly to their systems. This is another reason to start thinking about utilising MTD-ready tools.
What records do I need to keep?
To be fully compliant with HMRC and claim tax relief, you need to keep adequate records of your business income and expenses. Without them, you won’t be able to submit an accurate Self Assessment tax return.
While you don’t need to open a business bank account, this can help you differentiate between personal and business expenditure. A separate bank account also makes it easier to keep your personal and business affairs separate.
Expenses are often a lifesaver for the self-employed. They allow you to focus on what matters most – generating business. Allowable expenses include but are not limited to:
- Computers and other electronics
- Travel expenses
- Cost of raw materials
- Home office supplies
You’ll need to deduct these expenses from your taxable income within your Self Assessment, reducing your tax bill. One of the many benefits of using software at this stage is that it’ll help you identify which expenses you may qualify for.
You’re currently entitled to keep records in a manner that works best for you – whether that’s digitally or on paper. If you can’t find all of your records and you’re certain some are missing, then you will need to use the ‘Any other information’ box on your tax return so you can provide provisional or estimated figures.
There are two ways in which you can report your self-employed income and expenditure to HMRC on your Self Assessment tax return.
Basically, you need to record your income as you are paid and then your expenses when you spend. This method was created to make accounting and Self Assessments easier for small businesses and sole traders. The majority of self-employed individuals are eligible to use this method, provided they have an annual trading income below £150,000 (or £300,000 if claiming universal credit).
Otherwise known as traditional accounting, using accruals basis requires you to report your income and expenses based on the dates of invoices. So, if you’ve raised an invoice to a customer, but they have not paid you, then this income will still need to be included on your tax return. Likewise if you have received an invoice from a supplier but you have not paid them, you would also include this on your tax return.
Submitting your Self Assessment tax return
Your Self Assessment tax return is the document that informs HMRC of all the taxable income you’ve earned, along with any expenses. Please note that if you have sources of income where tax has already been paid, such as a PAYE job, then you still need to include this income on your tax return. Again, you can complete a paper tax return or file online (independently or through accounting software).
Paper tax returns are due by 31st October and online returns by 31st January.
The Self Assessment tax return (SA100) consists of eight mandatory pages, with additional pages (or schedules) being required dependent on your situation. If your sole trader earnings are below the VAT registration threshold (£85,000), then you will need to complete the Self-Employed Short supplementary page (SA103S). Alternatively, if you earn above that, you’ll need to complete the Self-Employed Full page (SA103F).
For online returns, you either have the choice of using software to eliminate some of the manual processes or submit via HMRC’s online service. If you choose the latter, your submission begins with a series of questions that result in a tailored tax return. During this process, you’ll be asked for more detailed information about your income as well as any expenses you intend to claim.
Think you’ve made a mistake? Don’t worry. You can amend your Self Assessment up to 12 months after 31st January following the end of the relevant tax year. If you submitted online, simply log on to HMRC’s Government Gateway. If you submitted a paper return, you’ll need to download a new tax return, write ‘amendment’ on each page you’ve corrected, and send them to HMRC.
Guaranteeing compliance as a self-employed worker
Self Assessment tax returns can drain your earning hours, and the process can be prone to errors if you opt to go down the manual route.
That’s why, at GoSimpleTax, we built our own Self Assessment tax return software – one that stimulates growth by minimising the burden of the tax return. Here’s just some of the ways it does that:
Saves you money
With complete visibility of your finances, you’ll be able to spot mistakes or possible recurring, unnecessary costs. Throughout the year, you can monitor your tax bill by adding your income and expenses regularly. In addition to tracking your tax bill, you could also spot any negative trends as they occur. GoSimpleTax will offer a few of our own tax-saving recommendations too.
Saves you time
Access your records from anywhere with software that works on multiple devices. You can even log expenses and invoices on the go – simply take a picture on your smartphone and upload it directly in our app. Your records are updated in real time.
The stress of working for yourself is high enough without the additional pressure of completing Self Assessment tax returns. If you regimentally store documents, and log your earnings and expenses, then at the end of the tax year you’re ready to file your tax return – no more scratching around for missing receipts close to deadline day. Once you’ve submitted through our software, you’ll get an instant confirmation that it has gone through to HMRC.
Allows you to focus on your business
As GoSimpleTax helps store your accounts as well as file tax returns, you’ll have no distractions from growing your service or product. Forget looking in different locations for the necessary information – with paper eliminated, you’ll have everything you need right at your fingertips.
And if this wasn’t enough, we’ll even let you trial our software for 14 days. Self-employment is meant to be on your own terms, and we aim to make it so. If you’d like to learn more about our tool or have any questions, simply get in touch with our team today.