One of the big differences between employment and self-employment is the tax system you’ll use. By law, freelancers must declare how much they’ve earned each year. This is so the government can determine how much tax and national insurance you need to pay.
In this chapter, you’ll examine the self-assessment tax return in more depth. You’ll discover what information you’ll need to fill in, how to determine which pages are relevant, the deadlines and fines if these aren’t met and how to tax plan.
Explore the self-assessment tax return
The self-assessment tax return is a form you fill in every year to tell the government how much you’ve earned. This form is also called the SA100. You can fill this in on paper or online, and there are different deadlines depending on which method you choose.
Paper deadline: 31 October
Online deadline: 31 January
Both deadlines are always for the previous tax year. So, for example, for the tax year 2018/19 you will have until 31 October 2019 to complete your paper tax return, and until 31 January 2020 to do it online.
Another advantage of filling in your return online, apart from having a further three months to complete it, is that your tax will be calculated immediately on completion of the form. If you decide to fill in the paper version, you’ll need to wait for the calculation to be done by HMRC, who will then write to you to tell you how much tax you owe.
What information will I need to help me fill it in?
The tax return is split into a number of different pages. Some of these, such as your personal details, will need to be filled in by everyone. But there are a number of pages you’ll only fill in if they apply to your particular situation.
Tailor your return
When you submit online, the first thing you’ll do is tailor your tax return by answering three pages of Yes/No questions. This process is explained in a little more detail in the following HMRC video.
It’s important to identify all the different types of income you’ve earned, because you’ll need to declare this on your tax return.
Employment | This is income from companies you’ve worked for as an employee. You can get this from your P60 (which you receive at the end each tax year), your P45 (which you receive when you leave a company or a P11d (for any expenses you were paid). |
Self-employment | All income from your work as a freelancer. Your sales sheet will help you calculate this. |
Property | If you own a property that you rent out, this income will need to be declared. |
Savings and investments | If you earn interest on savings or make gains on investments – such as stock or shares – you’ll need any statements that show how much you’ve earned. |
Dividends | These are payments made to directors from the profits of a company. This may apply to you if you have opted to become a limited company and have paid yourself dividends during the year. |
Pension | If you are receiving a pension, you’ll have to declare this in your return. |
Furnished holiday lettings | This applies if you own a holiday home that you rent out when you’re not there. |
Rent a room | You’ll have to declare any income you receive if you rent a furnished room out in your home. However, you won’t pay tax on this if you earned £7,500 or less. |
Foreign income | If you have received income from employment overseas, but are a UK resident, you’ll have to declare this income on your tax return. |
Capital gains | If you sell an asset, such as a rental property or piece of original art that has increased in value, you’ll be charged capital gains tax. The amount depends on the income tax bracket you fall into. |
Trusts | If you earn any income from a trust, you will need to declare this on your return. |
Once you’ve outlined all the forms of income you’ve received, you’ll need to gather together all the relevant documents and records to confirm each type of income before you fill in your return.
Identify your allowable expenses
You will not pay tax on your allowable expenses, so they are usually deducted from your income before your tax is calculated.
The expense and payments sheets you explored in the last chapter will help you fill in this section of the tax return.
Once you have all these documents together, you’re ready to fill in your tax return. If you’re filling this in online, only the pages relevant to your situation will be included. So, if you have no property income to declare, for example, this page won’t appear.
To access your account, you’ll need the User ID and Password that were sent to you when you first registered for self-assessment. You’ll need to enter these into the screen below before you can fill in, and submit your tax return.
Plan for tax payments
“For every £100 I earn, £30 isn’t mine” Money saving expert Martyn Lewis’s mantra for the self-employed.
The easiest way to plan for your tax bill is to transfer enough to cover tax whenever you receive a payment. Twenty-five per cent if you’re on the basic rate of tax, more if your income falls within a higher tax bracket. Any tax you owe is due by 31 January the following tax year.
This means if you’re filling in your tax return online on deadline day (like lots of freelancers), you’ll have to pay any tax you owe immediately.
… and avoid late penalties
If you file your tax return up to three months late, the penalty is £100. Submit it after this – or make a late payment – and the penalty will be more. To check how much you could end up paying, use the penalty calculator.
Now, with good financial strategies in place, you’ll be ready to start focusing on potential clients. We’ll do this in Part Three where you’ll look at ways to develop your business.
