Taxation can be a nasty shock to the newly self-employed. As an employee it was deducted at source for you, but now the payment and reporting deadlines are all your own responsibility
We’ll cover key points on tax, so often missed, and how to make provisions so you are not surprised.
By the end you will have a basic understanding of tax obligations so that, combined with effective bookkeeping and accounts, you can ensure these are met.
It’s important to remember that not all of your income is actually yours.
Therefore, the easiest way to deal with tax is to set aside a percentage of every invoice you issue and put it into a separate bank account, ready to pay the tax when it falls due.
This is another way people can become unstuck if they are full time self-employed and desperate for funds. They forget that what they receive is not actually all their own money and then have nothing saved when the tax becomes due.
The tax authorities are unlikely to have much sympathy if you have spent their money rather than keeping it for them. Indeed, the UK authorities may just pass the matter to their debt collection department.
If you are using an accountant then they can advise on what approximate percentage to save, based on your projected income as well as any other income in the tax year. This can then be refined as the business grows, so you are covered from the tax liability side with one simple deduction from any invoices you raise.
This is another reason why preparing your accounts soon after the year-end is important – if you leave it right until before the deadline you could find you have a large tax bill to pay with only a few days to raise the money.
An accountant will also ensure that you register correctly with the tax authorities at the start, and will remind you of upcoming deadlines – something that can easily be missed when your focus is elsewhere.
In the UK we also have national insurance that is collected alongside the income tax, and as well as this advance payments of tax towards the following year’s liabilities – called payments on account.
Many times I have seen people caught out in the UK when they did put aside some money for the tax, but forgot about the national insurance and then on top of these two the total liability was then increased to 150% of the total by the first payment on account.
To repeat the point made in the last session, the fines for getting things wrong can easily be more than the cost of getting professional help, so getting that help something I definitely recommend.
To illustrate how things are always changing, HMRC are proposing to change the system yet again – perhaps moving to quarterly tax returns with maybe a monthly payment for tax, so it is important to be kept up to date on changes.
We have covered the importance of making sure that you have provided for the upcoming liabilities and are not caught out. A straightforward tax percentage deduction is an easy way to simplify things. We have also made sure that you don’t waste money in unnecessary fines for not meeting the filing obligations.