Tax return tips for first timers
Posted on January 14 2020
Along with the start of the new year, January brings with it the dreaded tax return deadline. For any self-employed person, 31st January is a key date to add to your yearly calendar, along with holidays, birthdays and Christmas.
I'm in no way a tax expert and, if you're in any way unsure then I'd recommend seeking professional advice, but after running my business for 3 years and submitting 3 tax returns there are a few things I have picked up along the way which I thought might be useful to share. It's not going to be an in-depth summary of how to file your tax return, but hopefully a few helpful pointers and things to be aware of, especially if it's your first time.
If you have any questions about your tax return though, please don't direct them here. Make sure you contact HMRC directly - they are really helpful and they have an online chat system which I have found really useful in the past. It's important to do your own research as info on blog posts can quickly become outdated as time passes. And just to reaffirm what I said earlier, I AM NOT A TAX EXPERT.
Find the best method that works for you
I know people that swear by Quick Books for recording all their finances, and others who hire accountants. Personally I take care of all my finances myself, really simply in an excel spreadsheet. I make sure I keep all my paper receipts, separated by month, and save all of my digital data. Twice a year I will sit down and thoroughly go through it all. It might not be the most logical system for some, and I'm sure one day I might invest in some swanky software to make it easier, but at the moment it seems to work for me.
Working from home is an expense
If you work from home you can actually claim some general living costs back as you are basically supplying your own office. This allows you to expense a portion of your rent/mortgage, utility bills etc as a business expense. It can be tricky to work out exactly what that would be, but the simplified flat rate expenses system (see here) can provide you with a generic monthly allowance to cover this.
Give yourself time to do it
Tempting as it is to leave it all to the last minute, there are a couple of good reasons why you should try to avoid that. If you haven't registered to do your online self assessment already then it's useful to know that once you sign up online you also have to wait for some log in details to be sent to you via post, which can take some time to arrive, so make sure you allow for that.
The deadline for submitting AND paying your tax bill is 31st January, and depending on how you pay, it can also take longer than you think. I pay by direct debit which takes around 5 working days to clear. I would recommend submitting everything at least 10 days before the 31st January to avoid any last minute panic about payment going through on time.
Be prepared for unexpected bills
You can roughly estimate how much you will owe if you keep track of your incomings and outgoings throughout the year. There is a personal allowance which changes yearly but for 2018/19 I believe it is £11,850. This is basically your tax free allowance so you won't have to pay any tax if you don't earn above this.
It is definitely worth setting aside approx 20-25% of your earnings (or 40-45% if you are earning over £34.5k) in a separate bank account specifically for your tax. It's a bit hard to know exactly how much you will earn when you are self-employed, as you won't necessarily have a steady income, so it's definitely better to be prepared.
Apart from tax there is also National Insurance to consider, which also varies depending on how much you earn, plus student loans if you are still paying them off.
National Insurance threw me a curveball when I completed my second tax return. In my first year my earnings were very low and so my NI was only around £150, which was certainly manageable. Little did I know that once you start making profits over around £8.5k, your NI is then calculated as a percentage of your profits, and my NI went from around £150 for the year to over £1000. Quite a shock when you haven't budgeted for it! So it's always worth saving a little extra just to be on the safe side.
Good to know
Another unexpected (and quite annoying) thing to prepare for is paying tax in advance. Once you have worked out your tax for the year, if you owe any, HMRC will use that as an estimate for what you will owe for the following year, and you actually start paying tax in advance. From what I recall you pay about 50% in advance at the end of January, and then the following 50% by 31st July. It's an odd system in my opinion, and feels a bit unfair considering how hard it can be to financially maintain a small business anyway, but it is useful to know so you don't get caught out with another unexpected bill.
The second tax date
As mentioned above there is a second payment date of 31st July for your predicted tax (also known as payment on account). The (sometimes good) thing about this is that your predicted tax is in fact only a prediction. It doesn't actually mean that is the amount of tax that you will owe. As soon as the financial year is over in April you can actually start to submit your next tax return. Remember 31st January is only the final deadline - you actually have from April 6th - January 31st to submit it, and sometimes doing it much earlier can work in your favour.
I had a very good second year of business so my predicted tax was quite high (by my standards). I knew that my third year hadn't been as profitable (which is kind of a blessing and a curse) and that I had likely over paid my predicted tax. There is nothing like the smell of a tax rebate to get you submitting your tax return early! I submitted mine before 31st July which meant I didn't have to pay the second instalment of my predicted tax, and I also got a small tax rebate. It also means I don't technically have to submit my next return until 2021, although I will aim to do it much earlier than that.
If you are an early bird and submit it as soon as you can after the financial year end, I believe you can also pay your tax in instalments, which for most of us is probably a little easier to manage that paying it all in one lump sum in January. Definitely pays to be an early bird sometimes!
It does feel very daunting doing your first tax return, but it really doesn't have to be. As long as you are prepared, and learn from your first experience should anything not go to plan. I'm sure I will discover something new the next time I do mine, it's a bit of a learning curve even for me. Just remember it's a massive achievement to be self-employed so completing your tax return, as horrible as it is, is a sign that you are doing really well!