If you’ve just started out on the road of self-employment or you’re doing additional work alongside your main job, then before you know it you’ll need to start thinking about your Self Assessment.
If you’ve never had to complete one, your first time could be a bit stressful, but don’t worry – we’re here to demystify the process.
If you’re unsure whether or not you need to complete a Self Assessment then, as a general rule, anyone who receives income that isn’t taxed at source needs to complete a Self Assessment. You can find out more in our article, “Do I have to complete a Self Assessment tax return?”.
This article includes:
What if I’m just doing a bit of work on the side?
Freelancing on the side is an increasingly popular way of supplementing your income. Many choose to keep this under wraps from their employer. However, while you may not want your boss to know about your other work, you can’t hide it from the taxman, so you’ll need to register as self-employed.
You’ll need to complete a Self Assessment so that the taxman knows exactly how much extra income you’ve earned, and how much tax you need to pay on top of your monthly PAYE tax.
Hopefully, those who started contracting, freelancing or became self-employed before the beginning of the last tax year (6th April 2018) will already be up to speed for the looming Self Assessment deadline on 31st January 2019, but for those who are new to the game, here’s the important information you’ll need to prepare for next year.
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Registering with HMRC
You’ll need to register with HMRC to tell them you need to submit a Self Assessment tax return. You must register by 5th October after the end of the tax year where you are required to file a tax return – for example, if you need to file for the 2017/18 tax year, you should register by 5th October 2018. If you miss this deadline, you may have to pay a penalty.
You can register online, by post or by phone – always make sure you give yourself enough time in case anything goes wrong. To register, you’ll need your:
- National Insurance number
- Personal and business details.
After you’ve registered, HMRC will send you a Unique Taxpayer Reference (UTR) number in the post. You use your UTR to register for HMRC Online Services. HMRC will then send you a PIN number in the post to access Online Services where you can file your Self Assessment. This arduous process should become simpler when HMRC rolls out online tax services, but for now, you’re reliant on Royal Mail and HMRC to get registered.
You can learn more about Self Assessment registration and accurate record keeping in our jargon-free business guide.
Once you’re registered, you won’t need to re-register in the future. You’ll get a yearly reminder to file your Self Assessment until you tell HMRC that you no longer need to file, perhaps because you’re returning to full-time employment or moved abroad, for example.
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One of the most important things you’ll need to do to file an accurate Self Assessment is to keep comprehensive records. The sorts of things you’ll need to keep records of include:
- Self-employed income (details of your invoices and business expenses)
- Income from employment
- Partnership income
- Rental income
- Foreign income
- Pensions contributions
- Gift Aid
- Pension income
- Payment on account
- Redundancy lump payment or unemployment benefit
- Capital gains.
If you’re ever in doubt of what you need to keep a record of, it’s better to err on the side of caution. Of course, the easiest way to know is to talk to a specialist and ask them for some advice. At Crunch, our easy-to-use online accounting software and unlimited support from expert accountants makes keeping on top of Self Assessments and your business finances simple.
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How much income tax will I pay?
Income tax is calculated on profits, so you’ll have to pay for any earnings that exceed the personal allowance on your total income. If you’re working on the side or in multiple jobs, then HMRC will want to know your income from self-employment profits – the amount left over after all business expenses have been deducted from your self-employment income.
Remember, your self-employment profits could push your total earnings into a higher tax band, which means you’ll have to pay more tax.
For the 2018/19 tax year, you can find all the tax rates and thresholds in our handy article.
Don’t forget that if you had any business expenses these can be offset against your income from self-employment, reducing your tax bill. We’ve got all the information you need on claiming business expenses, either as a sole trader or through a limited company.
If you’re an employee then the amount of tax you pay on your income through employment will be worked out by your employer through their PAYE system, so you only have to worry about paying the remaining tax owed through your self-employment profits or any other untaxed income you may receive, such as income from property or investments.
It sounds complicated, and it can be, but HMRC will lend a hand with some of the calculations. You simply enter the amount you were paid in the tax year, which you can find on your P60, as well as the amount you’ve earned through your self-employed work, and HMRC will tell you how much you owe.
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But wait, what about National Insurance?
It’s never that simple. While the National Insurance you pay on any income from employment is taken care of in your PAYE calculations by your employer, if you’re self-employed (or both employed and self-employed) then you’ll have to pay self-employed National Insurance on your self-employed profits. The amounts will be calculated by HMRC through your Self Assessment and must be paid by 31st January each year.
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How much should I put aside for my Self Assessment tax bill?
As a sole trader, it’s good practice to save around 30% of all of your self-employed earnings each month. You may need to put aside more if your profits are really high (say above £60,000). If you set up your business as a limited company then you may find you could pay less in tax. Here’s some information on whether being a sole trader or a limited company is the best option for you.
You may not actually have to pay 30% of your self-employed income, but it’s a good benchmark to ensure you’re covered when it comes to paying the tax you owe. We’ve seen far too many people find themselves in trouble when they don’t have enough cash to pay their tax bill.
One last thing to remember is that as well as paying your tax from the previous tax year you’ll also need to pay half of your expected tax bill for the next tax year. You’ll then also need to make another payment on account on 31st July. You can find out more in our article “What is a payment on account and do I have to pay it?”.
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How do I fill out my tax return?
Now comes the fun part. You’ve registered with HMRC, you’ve got all your logins and passwords, and you know roughly how much tax you owe and you’ve got enough cash to cover it. The exact amount you will have to pay on your profits from self-employment will be worked out using an annual Self Assessment tax return, which can be filled out online at Gov.uk.
We would always recommend filing your tax return as early as possible. This can be done anytime after the start of the new tax year, so long as you’ve registered and received your UTR unique code and log in details from HMRC. Leaving it to the last minute could result in a stressful festive season, and filing late will incur fines.
Once you’ve logged into the system, the process is not actually that daunting – so long as you’ve kept accurate records, which include all sales invoices and expense receipts. Essentially you’re just filling out a form and the system does the calculations for you.
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After you’ve double checked that all the information you’ve entered is correct, press submit and breathe. HMRC will tell you how much tax you owe and you then hand over the cash, usually via bank transfer, one last thing to remember is that since January 2018 it is no longer possible to use a personal credit card to pay your Self Assessment tax bill.
This is just a guide – taxes change depending on your individual circumstances. For more personalised advice and to speak to one of our finance professionals, give us a call on 033 3311 8001.
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In the meantime, don’t forget our handy Self Assessment Guide is available to download for free.