Tax Advice For The Newly Self-Employed
A work from home job (or jobs) is a convenient set up: flexible working hours; no commitment, and because as a freelancer you pay your own taxes, a higher hourly rate. Work is thin on the ground at the moment so self-employment is a sensible way of earning on multiple fronts, including work from home jobs such as paid surveys in the UK. Use the internet to find work online.
Her Majesty's Revenue & Customs (HMRC) is the organisation with the mammoth task of governing UK taxes. They can be unreliable; make it easy for them by phoning and also writing to them by mail. They're not trying to scam you, they are just snowed under.
First of all you need to ring HMRC to declare yourself self-employed. The number is 0845 915 4655. Prepare for a wait. Their automated phonelines are really annoying so be patient.
Paying your taxes - keep good recordsYou can either hire an accountant or assess your own earnings and file your return solo. It's not difficult so you do it yourself unless you have a really complicated financial octopus on your hands.
Just keep good records of your earnings and your expenses (travel, business purchases). Bear this in mind and you will make life easy for yourself. Either keep a diary of money coming in and going out, or use an Excel spreadsheet, or perhaps the most common way, shove all your receipts in a box-file and worry about it when your tax return is due.
January 31st deadlineAll freelancers must keep the tax brigade at HMRC happy by completing their tax return by the end of January each year. The UK financial/fiscal year runs from April to April (it has done since privatisation in the 1950s) and you pay your taxes one year later: in 2013 you pay for the tax year 2011/12.
When you register as self-employed you will be sent your Unique Taxpayer Reference number (UTR), a ten digit number that HMRC use to identify you. From now on you are a freelancer! Keep receipts in the box-file, and put money aside for your taxes at the end of the year. A good system is to direct debit 20% into another account. Being organised is the key to being self-employed. The tax return itself - what to expect.
You can start file your tax return from April, when the fiscal year ends. Eg: You can pay for the 2011/12fiscal year from April 1st 2012 until Jan 31st 2013.
You might expect a ton of jargon but it is simple really. There are only a handful of terms you have to understand, and the process is straightforward once you know what to expect.
Register online for self-assessment on the HMRC website, choosing a username and password - write this down because it takes a week to be issued a replacement. HMRC will post you a Gateway ID, which takes a week. Then you can start the real fun of filing your tax return! Make a cup of tea.
You will enter your name, address and other standard details first. When you are filling out the form remember that HMRC are catering for the entire UK. Not all of the options will apply to you. In fact, for the average, low-income worker from home, most will not apply.
In case you don't recognise some of the terms used, there will be an online glossary you can turn to. But as a quick reference here are some of the useful ones you should know, if you don't already:
- P45 - Employers issue these to employees when their contract is terminated, contains all pay up to the date of termination, and other details
- P46 - If you don't have a P45 when starting a new job you are often asked to complete a P46
- P60 - An employee's end of year pay summary
- PAYE - Employed people use a Pay As You Earn (PAYE) system that sorts all their tax and national insurance contributions for them. As an unemployed person you do it yourself
- Gross salary - Pre Tax and National Insurance
- Net salary - After Tax and National Insurance
- NICs - National Insurance Contributions. You pay around £3 per week on earnings over £5k per year: these are Class 2 NICs
Thresholds - How much tax should you be paying?Thankfully the online self-assessment system will do most calculations for you.
Income Tax Personal Allowance:
The 2011/12 Personal Allowance for Income Tax is £7225
The 2012/13 allowance will be £7605
On earnings above the personal allowance you will pay tax of rising amounts. There are lower, basic and higher rates. As your earnings cross each threshold they are divided and taxed. In other words, after the personal allowance, the first £2,560 is subject to 10%, further earnings up to £35,000 are subject to 20%, further earnings up to £150,000 are subject to 40%, and earnings over £150,000 are subject to 50% income tax.
HMRC stagger the tax so that a high earner doesn't have to give away half of their income at once: HMRC shave increasing amounts off, instead of a big fat slab. But if you're earning a modest amount you shouldn't have to pay more than a few hundred pounds in tax.
ConclusionTax returns are easy. The complicated and frustrating part is fitting it into your life. Keep good records, and prepare by storing your UTR number, your Gateway ID, user and password. Also, try not to leave it until the last minute!
About the authorDavid Thomas is the editor at www.workfromhomejobs.tv, a website that offers options for making money from paid surveys, working with the best companies who pay in cash or vouchers.
- Tax Advice For The Newly Self-Employed
- Questionnaire: Claiming Expenses When Working from Home
- Taxing Issues Affecting People Working from Home
- Simplest Way of Keeping Accounts for Your Home Business
- Expenses Allowed for Home Workers
- Home Career: How to Achieve Better Cash Flow
- Questionnaire Taxation for a Small Business Working at Home
- Save Tax When Working From Home
- Business Help from the Government
- Pricing Your Services
- Business Expenses
- Home Business Contracts
- Finance for Your New Company
- Dealing with Income Tax
- Distractions in the Home