Updated: Sep 26, 2019
Whether you've decided to start a side hustle, or to work as an independent consultant or freelancer, if this is the first time you've ever been self employed, you might be feeling overwhelmed at the thought of what you need to do. In today's post, I'm going to answer some of the questions we're frequently asked about where to start when you go self employed.
Do I need to tell HMRC?
Yes, you need to register with HMRC as self employed. You can do this online and they'll send you an authorisation code in the post so you can log on to their online system to file your tax return and view your tax account.
How do I charge my clients?
This depends on what you do. Most freelancers we work with invoice their clients and we recommend you do this as soon as soon as possible to minimise the wait for you to get paid. We wrote this post called "What do I need to include on my invoices" to make sure you're including the right things.
How can I keep track of my income and expenditure?
You do need to keep track of your income and expenditure and to keep supporting documentation because your business profit will be used to calculate your tax bill at the end of the year.
Some businesses with very few transactions choose to keep a list of income and expenditure in a spreadsheet and to keep their supporting receipts and paperwork electronically or in a paper file. We prefer businesses to use accounting software, especially once they have more than a handful of transactions each month as it just helps them stay on top of things and to get a better understanding of their business. We recommend QuickBooks Self Employed or FreeAgent.
What expenses can I claim?
You can claim expenses you incur wholly and exclusively for the purpose of running your business. We have a whole separate blog post just on this topic entitled "What expenses can I claim in my tax return" and we think this will help.
How should I deal with my paperwork?
Once you become self employed you're likely to notice you have lots of pieces of paper, invoices, receipts, as well as email invoices that you'll need to keep track of. To avoid the risk of putting it all in a carrier bag and forgetting about it until tax return season, we recommend that you either use accounting software or get organised with a system to keep on top of your paperwork from day one.
How will I pay tax?
If you're used to being on payroll and taxed each month, the system for the self employed might seem like quite a big change. Tax years run from 6 April - 5 April the following year and you'll need to complete an annual tax return which is due by 31 January in the year following the end of the tax year. Your tax bill will also be due for payment on 31 January, with a second payment by 31 July (known as a payment on account). Ultimately, you'll have one bill for each tax year, so it's quite a different system to get used to.
How much will my tax bill be?
This depends on how much you earn. Most people get a tax free allowance, the basic rate tax band is taxed at 20% with 40% after that, and 45% for the big earners. There are a number of things which will affect the exact calculation for each individual. You should be aware of the tax bands and use this to estimate how much tax you'll pay for the year based on your earnings for the full year so you can put some money aside each month. If this is all too much I'd really recommend again that you look at either QuickBooks Self Employed or FreeAgent which will help you estimate of your tax bill for the financial year as you go through the year in real time (provided you keep your software up to date of course).
What about National Insurance and my student loan?
These are calculated as part of your Self Assessment Tax Return and included in that same annual bill. Ensure you put money aside each month to cover these as well and use the self-employed national insurance rates info from HMRC to find out what you'll have to pay.
What else do I need to do?
We would absolutely recommend that you set up a separate bank account to keep your business income and expenditure separate from your personal transactions. Here's why you need a separate bank account for your business.
Can you do my tax return?
As a bookkeeping firm, self assessment tax is something we deal with all the time and we'd love to help with your tax return. Just get in touch for more information about our serices for sole traders.