Newly self-employed? Self-assessment can seem confusing. Let’s try to simplify things…
Whether you’re a tour manager or vocalist, designer or dancer, it often seems that the one thing all new creative freelancers have in common is a sense of confusion around tax and self assessment.
When you first approach it, self-assessment can be frustrating, confusing and worrying. I always think this scene from Black Books nicely captures the unique anguish of the clash between your lovely, creative brain and your tax return.
It’s not surprising then that tax and, in particular self assessment, frequently pops up among the top concerns of new freelancers.
Starting out in the creative industries? Read: Getting ready to graduate? 5 tips for new creative workers
Seeking clarity
So what can we do to alleviate some of that panic and actually get some clarity on the self assessment process? Aside from experience, it comes down to three things…
- Knowing where to get your information. In the UK, this will be the gov.uk site. The content in this piece is based on that information and I’ve included direct links to all the source pages.
- Staying organised. Regularly organising and storing your receipts, invoices and relevant bills/statements is essential. It will help you to quickly and accurately complete your return, evidence your claims should you be audited and give you more time to anticipate and deal with any surprises arising from the self-assessment process. Keep it simple and frequent.
- Seeking advice from a qualified professional: namely a tax advisor or accountant. An accountant can cost around £200 a year (more in London) for a basic self-employed client and may well save you this in tax and admin each year alone. At that price, you will likely still need to track your own income and expenses, but they will complete the return and answer any questions you have. Many also find the peace of mind to be well worth the fee.
Below I outline some of the key things you’ll need to know to get going as a new self-employed creative worker. This is about getting clarity – it is not an exhaustive list, it’s just meant to help you get up and running.
However, before we go any further, because I am NOT a qualified professional such as an accountant or tax advisor, I have to offer the following disclaimer, please read it.
DISCLAIMER: The information below and on CreativeMoney.co.uk is provided for financial guidance and education purposes only and is not intended to address your particular personal requirements. It is not tax advice, financial advice or recommendation and should not be considered as such.
Matt Parker is NOT a financial advisor, accountant or tax advisor and Matt/Creative Money is not regulated by the Financial Conduct Authority (FCA). This means he is not authorised to offer financial or tax advice.
Always do your own research and seek professional advice from an accountant or tax advisor before acting on any of the information provided here.
The content in this guide is based on information sourced from gov.uk and was accurate at the time of writing. Creative Money and Matt Parker cannot be held responsible for subsequent changes to the law or tax system.
Help I’m new to self-assessment!
Getting started? Gov.uk is your gospel.
First and most importantly: for all information relating to UK tax, use gov.uk’s pages on Self Assessment.
This is the official site of the UK government/HMRC. Be wary of all other platforms – even this one – as they may not always relate to the UK laws, carry the correct qualifications, or be kept up-to-date.
Do I need to register as self-employed?
When you are self-employed/freelance (unless you setup as a company or partnership) you are a ‘sole trader’ in the eyes of the taxman. Here’s Gov.uk’s criteria for being self-employed.
Anyone who earns over £1,000 in a single tax year from self-employed work (even students) needs to register as self-employed and complete a self assessment tax return. Head to Gov.uk to register as self-employed.
Once registered, you can complete the self assessment process online and the site calculates the amount owed based on your profits.
How does it work?
To calculate our profits (and later our tax) we need to know how much our business as a sole-trader has earned and how much it has spent:
Your business income – your business expenses = your profit.
You are responsible for tracking and evidencing your own income and expenses. Once a year you will then enter these figures to calculate your income tax, student loan and national insurance payment, via the self-assessment website.
Personal Allowance for self employed workers
Everyone gets a tax free Personal Allowance, which is the amount you can earn in income (or self-employment profits) before you have to pay income tax. As I write this, in May 2021, the standard Personal Allowance is £12,570.
National insurance for self employed workers
National insurance payments are collected in addition to income tax and are essentially another form of taxation.
You will be liable to pay tax and class 4 national insurance on profits above £9,569 at 9% and above £6,515 you pay Class 2 national insurance at £3.05 a week – payable annually with the rest of your bill.
Student loans and self assessment
As with the Personal Allowance, self-employed workers share the same threshold for student loans as regular employees. As of April 2021, that will be £27,295 for new graduates.
However, whereas regular employees have an automated deduction from their pay cheque, the self employed make the repayment in an annual lump sum based on their profits, which (as mentioned above) is rolled into your income tax and national insurance payment.
Here’s the gov.uk guidance on how to tell HMRC about a student loan on your tax return. Here’s a bit more about student loans, from a previous piece I wrote.
When is the self-assessment deadline?
The tax year runs 6 April to 5 April. Your first payment will be due on or before 31 January, following the end of your first tax year.
https://t.co/X3OJdKZgwU pic.twitter.com/u8bI1El3xd
— Viz Comic (@vizcomic) November 9, 2021
You will need to keep records of all your business expenses and income. Keep hold of these for at least 5 years after the 31 January submission deadline of the relevant tax year.
For instance, a new graduate who has started doing self-employed work after 6 April 2021 would complete their tax return following the end of the year tax year in April 2022. They will then have until the deadline of 31 January, 2023 to complete the return and make their payment. They would also need to hold the records until at least 31 January 2028.
OK, now let’s get on with being self-employed…
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Invoices and getting paid
What you need to know to create your invoices
To get paid for your work as a self-employed person, you will need to send an invoice. This is a request for payment from your clients and there are rules about what an invoice needs to contain.
Make sure your invoice includes the following information:
- a unique identification number
- your company name, address and contact information
- the company name and address of the customer you’re invoicing
- a clear description of what you’re charging for
- the date the goods or service were provided (supply date)
- the date of the invoice
- the amount(s) being charged
- VAT amount (if applicable)
- the total amount owed
You can track the key information from your invoices (dates, invoice number, clients, jobs, amounts) on an income spreadsheet for the year. This will help you to keep on top of payments you have received and give you a running tally on your income.
Use a separate bank account for your business
Setting up a separate bank account for payments and business expenses will help simplify your record keeping process and make it easy to review business transactions.
As a sole trader, it does not have to be a business account, a separate current account will do. Should you ever form a partnership or limited company then it needs to be a business account in the business name.
Expenses
You can deduct some of the costs of running your business provided they are allowable expenses.
This is the link you need for Gov.uk’s guidance on claiming expenses while self-employed. You can’t claim absolutely every cost you incur for your business, though.
Allowable expenses typically include the following…
- office costs, for example stationery or phone bills
- travel costs, for example fuel, parking, train or bus fares
- clothing expenses, for example safety gear or stage wear
- staff costs, for example salaries or subcontractor costs
- things you buy to sell on, for example stock or raw materials
- financial costs, for example insurance or bank charges
- costs of your business premises, for example heating, lighting, business rates
- advertising or marketing, for example website costs
- training courses related to your business, for example refresher courses
Keep records and evidence of all your business expenses and income – this might include bank statements, receipts and invoices. They need to be well-organised and accessible. This is important should you be audited, but it also makes filling in your return much easier.
You can periodically log your expenses on a spreadsheet or use an accounting app to scan/record them. If you use a digital method to store receipts, make sure you scan both sides.
Joint business and personal expenses
If you use something for both business and personal reasons, you can only claim allowable expenses for the business portion of your usage.
To calculate this you need to make a reasonable estimate of your business usage. For instance, if you know 50% of your phone usage is business related, you can claim half of your phone expenses for the year. The key word here is reasonable, so when in doubt, err on the side of caution
There are lots of areas this joint usage might apply to, but in order to make things easier HMRC provides some ‘simplified expenses’ calculations for key situations. These are flat rates you can use to calculate the costs of working from home, living in your business premises and ownership/use of vehicles. You can choose to use these instead of your actual expenses (though you will still need to retain records of your actual usage).
Using your vehicle for work
If you use your vehicle for work purposes, you can claim a flat rate for work trips of 45p per mile for the first 10,000 miles and 25p per mile thereafter. Across a whole year this could really add up, so remember to track your mileage, particularly if you’re a touring artist.
While, we’re on the topic of vehicles: remember you will need to add business use to your car insurance if you use it for work. Otherwise, you may not be covered for any accidents that happen while travelling for work.
Saving for your tax payment
The art of saving when you don’t know how much you’ll need
A tax bill can represent a significant amount of money, so it’s a good idea to ‘save as you go’. One way to do this is by deducting a percentage of each payment made to you to set aside for your tax bill.
A loose rule of thumb is to save 25% of everything you are paid for self-employed work. However, those anticipating payments on account, may want to aim for more like 40%.
This will vary for everyone, of course. If you want a little more clarity on your own numbers, Gov.uk has a tool to help you budget for your tax bill.
You may also find it helpful to store those savings in a separate bank account for each tax year, as it can help you avoid the temptation to dip into them.
Struggling to establish a savings habit? Read: How to start saving (when you don’t think you can)
Completing your tax return
Calculating your tax bill
Once you are registered you can login to the self assessment portal and complete your tax return from the end of your tax year (5 April for most). Your tax return (and subsequent first payment) will be due by 31 January in the following year.
You’ll need to enter some information about yourself and your business, then enter the figures as prompted for various forms of income and expenses. It will then produce your calculation for your tax, national insurance and student loan payments based on this information.
It all comes out as one total figure. This is how much you will need to budget to pay by the 31 January (and, if necessary, 31 July) deadlines.
Don’t forget payments on account
If your tax bill is more than £1,000 you will likely need to make payments on account. These often surprise people who are new to self assessment.
- This is a downpayment on your next tax bill that equates to 50% of your current tax calculation. Payments on account are split equally across two instalments. One is due 31 January alongside the rest of your tax bill, the other by 31 July.
- Effectively, once you hit the threshold you will need to pay 150% of your tax bill across the January and July deadlines associated with that tax year – the current calculation amount and the additional 50% downpayment on next year’s bill.
- The following year you will pay the remaining balance (i.e. the difference between your actual tax bill for that year and the payment on account you have previously made) and your next payment on account instalment. This then feeds into the following year’s bill and so on…
- Here’s the gov.uk link for more information on Payments on Account
Need help? Don’t wait to contact HMRC
If you have an issue, the absolute worst decision is to ignore it – there can be serious penalties for not paying your tax. There’s almost always a better outcome to found by taking any problems directly to your accountant or HMRC.
Here’s the Gov.uk link on Help and support for self-assessment
Here’s the HMRC Self Assessment advice line: 0300 200 3310.
HMRC are even on YouTube. They post using the (very catchy) handle HMRCgovUK. See…
How to pay your self assessment tax bill
Finally, when you have completed your calculation and have enough money set aside, you have to pay your bill!
Fortunately, HMRC make this step nice and easy. There are options for bank transfer, direct debit, debit card payments, paying via your bank or building society and paying via cheque, among others. See the full list of ways to pay over on the Self Assessment site.
Whichever method you choose, make sure you allow plenty of time for the funds to clear, as they need to be with HMRC by the deadline date for you to avoid late penalties.
