Dealing with Income Tax
Nothing is certain but death and taxes said Benjamin Franklin. As you begin a new career at home, it is natural to expect that your tax affairs are going to get a little more complicated than they ever were before.
If you’ve been working as an employee, your tax affairs will have been taken care of automatically by the PAYE system. Under this, your employer projects your income for the year in advance and deducts and forwards your income tax contributions to the government automatically.
Those who are not employees and whose income over the year is more variable (such as freelancers and the self-employed) must grow used to filing their own annual tax returns using the Self-Assessment form. You may be sent a tax return automatically, or you can request one from the government. You will also have the option of submitting your tax return online. This is usually easier as the tax is calculated automatically for you. (And don’t worry, you don’t have to do it all at once. You can fill in an bit, leave it, and come back to it later.)
The form can be a little intimidating at first but it’s written in plain English and there is a set of explanatory notes so, if you soldier through it, you can usually work out what you should be doing. If all else fails, there is a local-rate government helpline you can call to speak to an expert.
Income Tax for the Self-Employed
If you’re operating as a Sole Trader or in a Partnership, you’ll pay income tax much like anyone else, by submitting a yearly Self-Assessment tax return. Tax will be calculated based on your profits for the year (or your share of the profits in the case of a Partnership). You will have to be able to document this with a record of your business income and outgoing expenses. You are required by law to keep records of all your business transactions for a period of five years after the end of the tax year the records relate to. Partnerships must also file a separate tax return for the business, giving details of all transactions over the year.
If you’re operating under a Limited Company, you too will have to submit an annual Self-Assessment tax return and pay tax on your income for the year. Here, however, there are more complex but potentially rewarding options to explore. A good accountant will help you find various ways to minimise your tax burden. For example, one popular option is for you to pay yourself a minimal salary as an employee of the business but, instead, to receive your remuneration in the form of share dividends. Because of the way these different forms of income are taxed, you may find this saves you money.
Income Tax Self Assessment Important Dates
There are some important dates you have to bear in mind when you’re dealing with your own tax affairs.
6 April – 5 April – this is the “tax year”.
30 September – this is the deadline for submitting your tax return if you want HM Revenue to calculate your tax bill for you and be certain that they will do it before 31 January. Note that it is the September after the end of the tax year.
31 January – This is the final deadline for submitting your tax return. If you miss it, you will have to pay a £100 fine.
Payments on Account
Following your first year of self-employment, you’ll usually be expected to make Payments on Account of your income tax bill for that year. Standard PAYE taxpayers pay income tax as they earn money throughout the year. In your first year of self-employment, you will be doing it retrospectively instead. From then on, the government will usually send you bills, asking you to make early payments of your anticipated income tax contributions for that year. The calculation of the amount owed will be based on your tax return of the previous year.
The first Payment on Account should be on 31 January during the tax year. The second should be on 31 July following the end of the tax year. A third balancing payment (which may be a refund to you if too much was paid) should be made on the following 31 January.
There’s no doubt that, once you start out on a new career at home, your tax affairs are going to get a little more complicated. But with a little patient reading, and perhaps the help of some good software or even an accountant, the burden shouldn’t be too great – leaving you free to focus on whatever it is you do best, earning money rather than worrying about how the government is going to tax it.