When you decide that you’re going to become a Virtual Assistant and take over the Universe, one of the many, many things you’ll need to do is tell the Government you’re no longer working for The Man but for many men and women instead. The information below is based on current UK tax laws so make sure you’re up to date with what you need to do if you live outside of the UK.
* Updated 6th April 2020
When do I contact HMRC?
You tell HMRC when you start earning income from freelance work even if you’re still being paid by your employer.
How do I register as a sole trader?
If you start working for yourself in the UK you need to let HMRC know your situation has changed so they can update their records. You do this by going online and completing this form. which registers you for sole trader status and National Insurance (NI) contributions. HMRC then send you your Unique taxpayer reference (UTR) within six weeks.
What’s the Unique Tax Reference for?
Your UTR is used to submit your personal tax return online. After you register for self-assessment, you will be sent a letter that contains your UTR, then you will be posted an activation code so you can sign up to the Government Gateway site and complete and submit your tax return.
IMPORTANT – It can take a few weeks to get your UTR so never do this right at the end of January! Register as early as you can so you give yourself plenty of time to get your number and do your return before the January 31st online deadline.
Current tax rates and allowances
How much Income Tax you pay in each tax year depends on:
- How much of your income is above your Personal Allowance
- How much of this falls within each tax band
Some income is tax-free.
The current Personal Allowance for 2020/21 is £12,500 which is the amount of income you can earn before you have to pay tax on it.
Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance and it’s smaller if your income is over £100,000.
Income Tax rates and bands (2019/20)
The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,500.
You can also see the rates and bands without the Personal Allowance. You don’t get a Personal Allowance on taxable income over £125,000.
National Insurance contributions (NIC)
In addition to registering with HMRC for tax, self-employed people pay one of two types of NIC:
- Class 2 if your profits are £6,475 or more a year (you pay £3.05 per week)
- Class 4 if your profits are £9,501 or more a year (you pay 9% on profits between £9,501 and £50,000 and 2% on profits over £50,000)
National Insurance is charged in one go when you do your self-assessment tax return rather than taken monthly.
Some self-employed people don’t pay National Insurance through Self Assessment, but they may want to pay voluntary contributions. These people are:
- Examiners, moderators, invigilators and people who set exam questions.
- People who run businesses involving land or property.
- Ministers of religion who don’t receive a salary or stipend.
- People who make investments for themselves or others – but not as a business and without getting a fee or commission.
These people are probably not you, however!
Read more about National Insurance on the HMRC website.
Check how much you have paid in National Insurance Contributions.
What financial records should I keep?
It is a legal requirement in the UK to keep business records as evidence of what you’ve earned and what you’ve spent each tax year. HMRC could ask to look into your tax returns or claims and if they do they’ll want to look at your records of course.
You must keep records of:
- All sales and income
- All business expense receipts
- VAT records (if you’re VAT registered)
- PAYE records if you employ people
- Records about any personal income
- Cash books
- Mileage records
- Bank statements and chequebook stubs
- Your P60s if you’re also employed
When it comes to doing your tax return, you will also need to submit other info such as how much you have invested in your business as well as any money you have invoiced for but not yet been paid. You can read more about what business records you need to keep here on the HMRC website.
How should I keep my financial records?
You should keep your records either on paper or on your computer. For electronic records you must:
- Capture both sides of a document
- Save all information in a readable format
- Keep a back-up
Making Tax Digital (MTD)
Under MTD, the self-employed will soon be able to send HMRC summaries of their income and expenditure at least four times a year and submit quarterly tax returns through an online accounting platform such as Xero, QuickBooks, Sage, FreeAgent, Zoho etc.
HMRC says this will enable a more ongoing and accurate projection of tax due, as opposed to the current system of one tax bill at the end of the year. It’s already in use for VAT-registered businesses and I personally think it’s a good idea because it will afford us a more accurate cash forecast
Although the UK government announced in July 2017 that Making Tax Digital will not be mandated for taxes other than VAT until at least April 2020, it’s worth knowing what it is so you’re prepared for when it does come into force.
How long do I need to keep my financial records?
You need to keep business records for at least five years after the 31st January submission deadline of the relevant tax year.
What happens if I lose an expense receipt?
If you don’t have a receipt for a cash expense then just make a brief note of the amount you spent, when you bought, and what it was for.
What happens if my records are lost, stolen or destroyed?
If you cannot replace your records, you must do your best to provide figures. Tell HMRC when you file your tax return if you’re using:
- Estimated figures – your best guess when you cannot provide the actual figures.
- Provisional figures – your temporary estimated figures while you wait for actual figures (you’ll also need to submit actual figures when available).
How do I complete my tax return?
The UK financial year runs from 6th April to the 5th April and HMRC will contact you to request you submit your return form by the end of October by post or by the end of January online.
There’s a £100 fine if you submit your tax return up to 3 months after the 31st Jan deadline and more if it’s later than that.
You always submit information for the tax year just gone – so in October 2020 (if doing a paper return) or January 2021 (if doing an online return) you’re submitting financial information for the period 6th April 2019 until 5th April 2020.
What happens if I miss the deadline?
Under the current system, if you miss the January 31st Self-Assessment deadline, you will be fined £100 for filing a late return. You then have 30 days to pay your tax before 5% is charged on it.
You have 90 days to get your return in after which it will cost you £10 a day in fines up to a maximum of £900, followed by further charges six and 12 months after the deadline.
You have to pay ahead (payment on account)
You may not be aware of this, but you also have to pay a percentage of the next year’s tax and National Insurance in advance. So this is in addition to the tax you’re paying for the previous tax year.
Many freelancers get caught out by this.
HMRC take one payment by the end of January and another one in July. This is called ‘payment on account’ and these are advance tax and National Insurance payments towards your tax bill.
You have to make 2 payments on account every year unless:
- Your last Self Assessment tax bill was less than £1,000.
- You’ve already paid more than 80% of all the tax you owe, for example through your tax code or because your bank has already deducted interest on your savings.
Each payment is half your previous year’s tax bill. Payments are usually due by midnight on 31 January and 31 July.
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 next year.
Update on April 6th 2020: Because of coronavirus (COVID-19), you can delay making your second payment on account. If you choose to delay, you’ll have until 31 January 2021 to pay it.
Key dates and deadlines
- The UK tax year runs from the 6th April to 5th April so your accounts need to be calculated from and to these dates.
- 6th April is when you can start submitting your next tax return if you like.
- 30th October is the deadline for paying your Class 2 NIC (National Insurance Contributions).
- 31st October is the deadline for paper filing of tax returns.
- 30th December is the date that if you’re also employed, you can choose to pay any tax due through your PAYE code instead of making a big payment on 31st January. (But only if you submit your tax return before 30th December.)
- 31st January is the deadline for filing your online self-assessment tax return. It’s also the deadline for paying any income tax due, Class 4 NIC and your first payment on account for next year.
- 31st July is the due date of your second payment on account.
UK tax laws are a complete ball ache and things like personal allowances and NI rates usually change each financial year. I’m afraid you do need to make sure you stay on top of this stuff because HMRC are serious folk and they do not take ignorance as an excuse.
You should always check with HMRC if there’s anything you’re not sure about – or pay an accountant to make sure you’re compliant. HMRC have an online chat service and loads of training videos to help you.
- You can get more advice by calling Newly Self-Employed on 08459 154515 and by going to the Becoming Self Employed section of the HMRC website.
- Here is the HMRC tool to budget for your self-assessment tax bill. Simply enter your estimated weekly or monthly profit to get an idea of how much Income Tax, Class 2 and Class 4 National Insurance you’ll pay.
- Subscribe to HMRC’s YouTube channel. They also have lots of handy videos on how to submit your return.
- Sign up for free HMRC e-learning, webinars, emails and videos here.
- Here’s the HMRC page outlining the business records they want you to keep.
- Here’s an HMRC article outlining what you can claim under business expenses.
- Here’s a list of the different online accounting platforms that allow you to keep your records digitally and submit your tax online.
- Discover how much state pension you will receive. Clue: it’s not much and women receive less than men.
* This page was last updated on 6th April 2020.