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Self Assessment Tax Returns: A Guide for Freelancers

Recently, we ran a #WiredBrekkie which supported our freelance members with debate and discussion on how to cope with the feast and famine of freelancing. In this blog post, one of our speakers, Luke Thomas from Plus Accounting, shares his advice on how to best tackle your tax return submission and the financial considerations you should take into account.

If you're looking for further financial guidance, we regularly hold Digital Finance Clinics with Plus Accounting where you can get free, confidential, one-to-one advice. Our next one on Tuesday 19th November is specifically about self-assessment tax returns. Book your session here.

To effectively manage the feast and famine of freelancing from an accounting and tax perspective, it is first important to understand the basics of self-assessment tax.

As many of you will know, the tax year covers 6 April to 5 April each year. Your self-assessment tax return (covering the year to 5 April) is due for submission to HMRC by the following 31 January at the latest. That's if you don't want to incur penalties for a late submission.

The benefits of getting it done sooner rather than later

You may not be surprised to hear that the majority of tax returns are completed closer to 31 January, than to 5 April. This is often for a variety of reasons but, usually, none of these are good for your financial planning, tax efficiency or health from the stress of it all.

I always advise getting your accounts and tax return completed as early as possible, utilising quieter times during the year to keep on top of your record-keeping and all the expenditure you have incurred. If you leave it too long, you risk losing receipts and forgetting about some expenditure, which can result in you paying more tax than you should.

There is also plenty of information on HMRC's website about expenses you can claim as a self-employed individual, which I would encourage you all to read when you have spare time! If you have more complicated tax affairs, you may want to seek professional advice to ensure you are taking advantage of all the allowances and deductions you are entitled to.

The other benefit of dealing with your tax return sooner rather than later is that you are aware of your tax liability (the total amount of taxation you incur) far in advance of when it is due, and so you have more time to consider how you will settle this.

Understanding your tax liability

Income tax and Class 4 National Insurance liabilities for the year to 5 April are payable initially by the following 31 January (the same deadline as submitting your return).

If your liability for the year is less than £1,000, then you are just required to pay the amount due by 31 January.

However, if your income tax and Class 4 National Insurance liability is £1,000 or more, then you are required to make 'payments on account' (an advance payment towards your tax bill) for the next tax year. The payments on account are automatically based on your liability for the previous year and mean you would pay 50% of the prior year's liability on 31 January and 31 July respectively.

For example, if your liability for the previous year was £1,000, then you would be required to make two payments on account of £500 each. This would mean not paying £1,000 on 31 January, but £1,500 with a further £500 the following July. An important reason to know well in advance!

Once you calculate your tax liability for the next year, you would deduct the payments on account you have made and pay the balance due by the following 31 January (or get a refund if you have overpaid because your liability is lower). But, if your liability was over £1,000, payments on account would again be due.

As you will appreciate, payments on account are an estimate. They may be very different from your actual liability, possibly because profits have risen significantly year on year or vice versa.

If you think your tax liability will be lower, you can submit a claim to reduce the payments on account to a more accurate level. This can be a very useful option if cash-flow is an issue and (I am not advising this as a routine strategy) even if you don't think your tax will be lower, you can still claim to reduce your payments on account if it helps tax planning.

HMRC will charge interest on any underpayment of the payments on account, but this could help you defer your tax liability by up to 12 months at a relatively lower interest rate.

If you can, I would encourage you to save for tax monthly, based on what you estimate your tax to be for the year. Estimating your tax requires taking into consideration as best you can your likely income and expenditure for the tax year. You can then plug these into online free calculators (for example) or ask your accountant for an estimate of your tax, so you know how much to put aside.

It is important to be aware of the different liabilities your income from self-employment will generate.

It is fairly common knowledge that we all have an income tax personal allowance, which for the current tax year is £12,500, and means your first £12,500 of income is tax-free. However, what you may not be aware of is that Class 4 National Insurance has a threshold of £8,632 and means that any profits from self-employment above £8,632 will incur a 9% national insurance liability, which is payable via your self-assessment tax.

In addition, Class 2 National Insurance is payable for those who have self-employed profits of more than £6,365. Class 2 National Insurance is £3 per week or £156 per annum and also payable through your tax return. This means if you earn £12,500, you would actually owe £504 national insurance, so it is very important to be aware of this.

The other 'stealth' taxes you should be aware of include student loan repayments, which are 9% of profits over £18,330 for Plan 1 loans and £25,000 for Plan 2 loans. Also, the Child Benefit clawback, which starts from income exceeding £50,000.

I appreciate much of this is not always possible or appealing. If you have troubles with your tax, I do encourage seeking professional advice, even if just for the peace of mind that what you are doing is okay.

If you do have payment difficulties, then you can contact the HMRC self-assessment payment support team and discuss a 'time to pay' arrangement, which could allow you to pay your tax over a number of months without penalty for late payment. I would recommend you contact HMRC before the payment is due for the best result.

Hopefully this advice will help you manage your finances better in some way and help you enjoy the feast and not worry as much about the famine!

Plus Accounting is a firm of chartered accountants, registered auditors and business advisers in Brighton, offering a comprehensive range of tax and accounting services.

Luke Thomas (Business Services Director) joined the firm in 2008, with much of the focus of his work being in the Technology, Media and Innovation sector.

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