5 Tips on filling out your tax return when you’re self-employed
OK, you may be thinking that it’s a little early in the year to be writing articles about filling out a tax return, but we’ll let you into a secret – you don’t have to wait until 31 st January to submit your tax return. In fact, you can submit your tax return as soon as the new tax year starts on the 6th April.
So what else do you need to know about filling out your tax return when you’re self-employed? Here are our 5 tips.
1. Know your employment status
Are you employed or self-employed?
- If you’re employed you will work under an employment contract, have employment rights and you will have your tax and National Insurance contributions deducted from your wages, prior to you receiving your pay.
- You’re self-employed if you are in business for yourself – you’re responsible for your business, for how it’s run, for its losses and its profits, you decide who you work for, when you work, how you work and where you work.
Remember you can be employed and self-employed at the same time, ie you work for your employer during the day, but you run your own business at night. In which case you will need to fill out a tax return for your self-employed work.
Filling out a tax return is a very similar process if you’re a freelancer, small business owner, contractor or sole trader. If you’re a company director, a club secretary, or if you hold a position in another office there are different rules you need to follow.
If you need more guidance on your employment status, check out gov.uk.
2. Your unique taxpayer reference (UTR)
If this is the first time you are filing a self assessment tax return, you will need to register with HMRC before you can file. And you need to register by 5th October. It’s easy – simply register here.
Don’t leave registering until the last minute because it can take up to 10 days for you to receive the letter containing your UTR – your unique 10 digit number. Your UTR remains the same for as long as you live, just like your NHS number or your National Insurance number. And you need a UTR to submit a tax return.
However, if this is your first time submitting a return, you have one more hoop to jump through (which you only do once). Once you’ve received your UTR and you’ve created a new self assessment online account, you’ll be sent a one time activation code through in the post. HMRC typically send these activation codes within 7 working days of you signing up. You will need to enter this activation code within 28 days of receiving it, or else you will have to request a new one.
If you do leave registering until the last minute you can try your luck phoning HMRC to get your UTR, but remember, ignorance is not an excuse and HMRC don’t take pity on first timers.
3. Decide if you want to file a paper or digital tax return
For the time being, you don’t have to file a digital tax return if you don’t want to. You can still submit a paper tax return for if you’re self-employed, however the deadline for paper tax returns is 31st October.
If however you want to keep your tax all online, you have until 31st January to file your tax return.
For either return, paper or digital, you need to pay your bill by 31st January, or you risk receiving a late payment penalty.
4. Know what expenses you’re entitled to
When you’re self-employed you’re entitled to offset a number of costs against your self assessment tax bill. And these costs are known as allowable expenses.
Before you get excited and try and offset your tax bill with the new car, or the house renovation, know what expenses you’re entitled to claim for:
- Office costs ie phone bills, furniture, insurance
- Travel costs ie fuel, parking or train fares
- Staff costs ie salaries
- Cost of running your business premises ie heating, electricity, business rates
- Advertising and marketing ie website development costs
If you’re self-employed and you work from home, don’t forget to offset the cost of working from home. By which we mean, you can claim back a percentage of the household bills you pay ie heating, council tax, electricity, because these things are essential for you to run your business.
There is no set percentage that you can claim for, instead HMRC asks that you deduce ‘a reasonable method’ of dividing the household costs. This can be done based on the amount of work you do at home, or the time you spend there, or the number of rooms you use – it’s your call.
If you run a limited company, you can deduct these expenses from your profits before tax.
For a full list of tax deductible expenses for the self-employed, go to gov.uk.
5. How to avoid overpaying tax
We’ve covered expenses that you can use to offset your tax bill above, but they aren’t the only way you can avoid overpaying tax if you’re self-employed.
- Get your partner involved. If your partner is able to work, put them to use – receptionist/admin assistant/appointments booker. Whatever skills they possess, employ them to fulfil the roles you need doing. They have a tax free personal allowance up to £12,500. You get an allowable expense.
- Pay into your pension. You can use unused annual allowances going back three years to increase the payments from the current annual allowance of £40,000.
- Don’t miss the deadline. You won’t have to pay more tax, but you will have to pay a late filing penalty.
Finally, if you need any assistance at all filling out your tax return if you’re self-employed, just ask, and you will receive help.
You can either contact HMRC directly, or you can use a tax accountant who specialises in self-employed people. Ignorance isn’t an excuse HMRC accept, nor are any of the above excuses.