Everything you need to know about preparing for your Self Assessment
If you start earning money as a freelancer, there is a specific process to follow to tell the government what your income was, and pay taxes on it.
This post will summarise everything you need to know about your Self Assessment as a self-employed freelancer, and I will share my best advice on how to make the tax return submission as stress-free as possible.
What we’ll cover:
- What is the Self Assessment Tax Return?
- Who needs to submit a Self Assessment?
- How do I register for Self Assessment?
- What are payments on account?
- Self Assessment deadlines and important dates
- What taxes do self-employed people pay?
- What is taxable income?
- What are allowable expenses?
- What if I’ve worked as a freelancer as well as an employee?
- What you should do to keep your financial records as a freelancer
What is the Self Assessment Tax Return?
Self Assessment is a system through which HMRC* collects income taxes and national insurance contributions from anyone who earns an income, and is liable to pay taxes in the UK.
*HMRC stands for His Majesty’s Revenue and Customs, and it is a branch of the government dedicated to collecting taxes.
Who needs to submit a Self Assessment?
If you earn income in the UK, you will need to submit a Self-Assessment if in the last tax tear (which runs from 6 April to 5 April of the following year) any of the following applied to you:
- You were self-employed as a sole trader and earned more than $1,000 in gross sales.
- You were a partner in a business partnership
- Received any other untaxed income, such as income from a property, a commission, foreign income, and income from investments and/or savings.
There might be other reasons for you to file a Self Assessment: you should read HMRC’s guidance carefully to see if any of those apply to you.
How do I register for Self Assessment?
Here is a step-by-step roadmap to get you set up and ready to submit your Self Assessment Tax Return.
1) Create a Government Gateway account.
If you’ve never submitted a tax return before, you will need to create your business account on HMRC’s web portal (called Government Gateway). In order to do so, you will need to create sign in details.
The HMRC portal will ask you for your personal information, such as your full name,email, address, and your National Insurance number.
If you don’t have a National Insurance number, it’s probably because you just moved to the UK: you will need to apply for it as soon as possible, as otherwise you will be charged tax without taking into consideration your tax free allowance.
2) Get your UTR (Unique Taxpayer Reference)
Once you create your account, you will need to register for Self Assessment using form SA1. After this, you will be sent a UTR number.
UTR stands for Unique Taxpayer Reference, and it is a number associated with your business account. you will need your UTR to file your Self Assessment, and you will need to include it in your sales invoices.
3) Activate your Self Assessment
Once you receive the UTR, you will need to log back on your Government Gateway account, and activate your Self Assessment.
You are now ready to file your tax return through Self Assessment.
What are payments on account?
Payments on account are advance payments towards next financial year’s tax bill. You will only need to pay these if your bill is £1,000 or over: if this applies to you, you will need to pay the entire tax bill, plus 50% of it by the 31st of January, and the other 50% by 31st of July.
This is because HMRC shifts taxpayers from paying the entire tax bill at once, to paying 50% of it in January and 50% of it in July.
Your payments on account will assume that what you make in one year will be the same as what you make the next. If you know that you’re going to earn less in the current year, you can ask to reduce your payments on account (or increase them if you think you’ll be earning more).
If you still have tax to pay after you’ve made your payments on account, you must make a ‘balancing payment’ by midnight on 31 January. If you have paid more that what you end up owing, you can either leave the difference as a credit on your tax account, or request for it to be paid back to you.
Read more about payments on account on the government’s website.
Self Assessment deadlines and important dates
Here are some important dates to make note of:
1) The tax year (or fiscal year, or tax period)
This is the period you are reporting on, and it runs from the 6th April, to the 5th April of the following year.
When you prepare the information on how much you earned and how much business expenditure you have incurred, you will need to include all activity within the tax year you are submitting the tax return for.
2) Self Assessment submission and tax payment deadlines
You will need to submit your tax return and pay any taxes due by the 31st January of the year after the end of the tax period.
For example, if I am filing my tax return for the period from 6 April 2021 to 5 April 2022, the deadline for me to submit the Self Assessment and pay my taxes will be the 31st January 2023.
If you are late in submitting and/or paying your Self Assessment, you will be liable to pay a £100 late filing fee, plus you will accrue interest for every day you are late.
3) Payment on account deadlines
If your tax bill is over £1,000 for the first time, not only will you need to pay the entire tax bill, but you will also need to pay an extra 50% of it by the 31st of January, and another 50% by 31st July. These two additional 50% payment will be towards the next year’s tax bill.
What taxes do self-employed people pay?
In the UK, freelancers pay the following taxes on their income:
- Income tax
- Class 2 and 4 National Insurance Contributions (also called NICs).
The above are calculated based on your net profit, which is the difference between your taxable income and your allowable expenses (I will expand on these later).
If your profit as a freelancer is lower than certain thresholds, you might not need to pay income tax and NICs.
HMRC holds the most recent information about the thresholds above which you pay income tax, and the thresholds above which you Pay NICs.
What is taxable income?
Your taxable income is all the money you receive that you need to pay taxes on. Here are a few examples of taxable income:
- Any income you earn in exchange for your work, may that be a product you sell or a service you offer
- Rental income from a property you own
- Rental income from a room you rent out from the home you live in (although the first £7,500 are tax free thanks to the Rent a Room scheme)
- Dividends received from owning shares or being in a partnership
- Most grants received by the government
- Grants and donation received from trusts and foundations, if they are given to you to run your business
Here is further information about what income is and isn’t taxable.
What are allowable expenses?
Allowable business expenses are all the costs you incur in order to be able to run your business and to your job. It is extremely important that you keep track of your allowable expenses, as these will affect your taxable profit.
A few examples of allowable expenses
- Office expenditure such as software subscriptions, stationery, office furniture
- Finance costs such as bank fees, insurance, accountancy and bookkeeping costs
- Training and professional development costs
- Direct materials for resale (for example, if you sell woven scarves on Etsy, you would be count the cost of the yarn as an allowable expense)
- A portion of your utilities if you conduct most of your business from home.
- Premise costs, such as the rent of an office or the rent of a workspace/desk
- Website and marketing costs, such as hosting and ad campaigns
- Food, travel and Accommodation costs if you are required to conduct business away from your place of work (which, usually, is the city you live in).
The list can go on and on, and allowable expenses vary a lot according to the work that you do. For example, actors are able to claim the cost of a haircut if it is done in view of a specific role they have been cast for. Or, a photographer can claim the cost of their photography equipment.
In order to understand whether an expense can be considered an allowable business expense, you should ask yourself if you would be incurring it if you weren’t working.
However, there might be costs that you incur that are both personal and professional: for example, if you are a writer, you can argue that reading a lot is part of your job. However, it is also true that not all the books that you purchase are solely because you are a writer, and that you also read for your own personal pleasure. In this case, what most people do is only claim a percentage of those costs, based on what seems fair.
Here is more information about allowable expenses.
What if I’ve worked as a freelancer as well as an employee?
It could happen that within a fiscal year, you have earned income as both a freelancer, and as an employee. To be considered an employee, you would need to be added on an employer’s payroll, and you would receive a paycheck which details how much income you have earned, and how many taxes have been deducted before your net pay is paid to you.
If this applies to you, you should make sure to ask your employer for a P60 or a P45 form.
The P60 form includes the taxable income and taxes paid for the fiscal year you worked with them. If you left before the fiscal year ended, you will receive a P45 form.
You will need these forms to fill in the ‘employment’ section of your Self Assessment form.
What you should do to keep your financial records as a freelancer
There are a few responsibilities you hold as a freelancer when it comes to keeping your own financial books.
1) Keep records of your income
This can be done by raising an invoice every time you are due a payment from one of your clients. Most clients require you to send them an invoice anyways, as they, too, will need to keep their records correctly.
If you keep a tidy record of your invoices, you will always know who owes you payment for what, and how much you have earned over the fiscal year.
2) Keep all the invoices and receipts for your allowable business expenses.
If you are making a purchase that you know you will be able to claim as a business expense, you will need to keep that document for at least 6 years.
My suggestion is to create a new email inbox that you should use just for this purpose, and you should forward to that inbox photos/scans of your business receipts and invoices, so that you don’t need to hang on to the paper document, and so that they are safely stored in one place for you to be able to look back to when you’ll be calculating your total business expenses in view of your Self Assessment.
3) Keep a record of your Tax Return workings
When you’ll get ready to file your Self Assessment, you will need to calculate the total of the income you’ve received as a self-employed freelancer, and of all the allowable expenditure you’ve incurred.
As an Excel lover, I always suggest people use either an Excel spreadsheet or a Google sheet to do so: I discourage anyone from using Word or pen and paper. Excel prevents human mistakes and does all the calculations for you with just a few easy formulae.
By the time you are ready to submit your Self Assessment, you should have a worksheet that details the totals of your income and claimable expenses, and how those have been worked out.
For example, it should include an itemised list of your business purchases, and also how you have worked out the portion of your utilities you may be claiming as an allowable expense.
Having these workings saved and stored somewhere means that you will be able to remind yourself how you got to the numbers you have reported in your Self Assessment even years down the line, and it is proof that you have done your due diligence to calculate your income and expenditure as correctly as possible.
4) Ensure you have enough cash to pay your taxes by the deadline
As the year goes by, you need to make sure you are setting aside enough cash to be able to pay your tax bill in January. Furthermore, if you think you will owe more than £1,000 in taxes, you need to be prepared to make those two payments on account on top of paying the tax bill.
My advice is to set aside at least 20% of every payment you receive, and store it in a savings account that you should never dip into until you are sure there is enough in there for you to make your tax payments.
Don’t underestimate the importance of managing your cashflow carefully: it can be tempting to spend all the money you receive the moment you receive it, but you need to remember that not all of it is yours. If you are not able to pay your tax bill by the deadline, HMRC will charge you interest for any day you don’t make the payment.
In this article I summarised the most important information about Self Assessment for the self-employed. You should ensure that you understand all of the following before you submit your Self Assessment:
- What your taxable income and allowable expenses are
- What taxes you may end up paying based on your profit
- What records you should keep to ensure you are compliant
- How much money you should have in your bank in order to pay your tax bill
I hope this roadmap is helpful to you, and if you have any questions, do leave them in the comment section.