When you decide that you’re going to become a Virtual Assistant and take over the Universe, one of the 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 please check what your own government requires if you live outside of the UK.
* This post was last updated on 6th April 2021.
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.
Should I set up as a Sole Trader or a Limited Company?
There are a few differences but the main one is that when you are a Sole Trader, any business debts become your debts and any personal assets – including your house if you own it – are not protected if someone decides to sue you.
With a Limited Company, the structure is different, tax thresholds and payments are different, how you pay yourself is different and you need to register your business with Companies House.
You do not need to register with Companies House if you are a Sole Trader.
In my opinion, it’s also more complicated to incorporate and submit your tax returns. I was advised to become a Limited Company after I bought my property but I was a Sole Trader before then. I personally think it was easier being a Sole Trader and I now rely on my Accountant to help me.
As most UK VAs (and freelancers, in general) are Sole Traders, and because this post would be so long and complicated your head would explode, this post is focused on Sole Trader tax and NI only.
- You can find more info from HMRC on running a UK Limited Company here.
- This article explains the differences between a UK Sole Trader and a Limited Company.
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 self-assessment 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 they will send you an activation code so you can sign up to the Government Gateway website 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 to allow plenty of time to receive your UTR so you can submit your tax return before the January 31st online submission deadline and avoid a fine.
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 income falls within each tax band.
Some income is tax-free.
The Personal Allowance (this is the amount you are allowed to earn before you have to pay tax on it) for 2020/21 is £12,570.
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 (2020/21)
The table below shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,570.
These figures are taken from this HMRC income tax rates page which contains other links you will find useful.
- You may have tax-free allowances for your first £1,000 of income from self-employment which is known as your ‘trading allowance’.
- You don’t receive a Personal Allowance on taxable income over £125,140.
- Income bands are different in Scotland.
National Insurance contributions (NIC)
In addition to registering with HMRC for tax, self-employed people in the UK pay one of two types of NIC:
- Class 2 if your profits are £6,515 or more a year (you pay £3.05 per week)
- Class 4 if your profits are £9,569 or more a year (you pay 9% on profits between £9,569 and £50,000 and 2% on profits over £50,270)
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 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 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. I personally think it’s a good idea because it will allow you to make a more accurate financial forecast.
Although the UK government says that Making Tax Digital will not come into play until at least April 2023 – and they keep moving that date back – 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.
Example – If you submitted your 2019 to 2020 tax return online by 31st January 2021, you must keep your records until at least the end of January 2026.
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 it, 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 either by post by the end of October or online by the 31st January.
You always submit financial figures for the previous tax year.
So, in October 2021 (if you’re submitting a paper tax return) or January 2022 (if you’re doing your return online) you submit your income and expenditure for the period between 6th April 2020 to 5th April 2021.
What happens if I miss the deadline?
Under the current system, if you miss the January 31st Self-Assessment deadline, you will receive a non-refundable £100 penalty. Then:
- You will be charged a penalty of £10 per day, up to a maximum of £900, if you file a tax return 3 months late.
- You will be charged £300 or 5% of the tax you owe (whichever is greater) if you file a tax return 6 months late.
- You will be charged another £300 or 5% of the tax owed (whichever is greater) if you file a tax return 12 months late.
You will be charged a penalty even if you do not owe any tax.
Basically, as long as you receive a letter from HMRC telling you to file your tax return, you must comply even if you do not owe any.
If your bill is less than £30,000 you may be able to pay in monthly instalments, but you definitely need to let HMRC know if you are having trouble paying.
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.
Key dates and deadlines
- The UK tax year runs from the 6th April one year to 5th April the next so your accounts need to be calculated from and to these dates. So as of 6th April 2021, we are currently in the 2021/2022 tax year.
- 6th April is when you can start submitting your next tax return if you like.
- 31st July is the deadline for paying your second Tax on Account instalment
- 5th October – if you become self-employed you need to register with HMRC for tax purposes by this date.
- 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.
How’s your head doing? Exploded yet?
As you can see, UK tax laws are a complete ballache 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.
Always check with HMRC if there’s anything you’re not sure about (I’ve provided a link to their online chat below) or pay an Accountant to make sure you’re compliant.
- All the information and advice you need can be found in the Self Employment section of the HMRC website.
- You can find the HMRC online chat service here. Bookmark this page!
- 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.
- Here is another personal tax calculator you may find useful.
- 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.
Disclaimer: I am not an Accountant and take no responsibility for the financial information published on this page. While I have obtained this information from official sources, please always confer directly with HMRC or a qualified Accountant.