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.
When do I contact 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. Once you get your UTR you can then sign up to register for HMRC online services which mean you can do your tax return online instead of completing a paper version, as well as seeing all the other useful info they have on their site for you.
* 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 tax return deadline.
HMRC have some handy YouTube videos; here is one on how to complete your self-assessment tax return.
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 2018/19 is £11,850 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
These are the tax rates you pay in each band if you have a standard Personal Allowance of £11,850.
Read more about tax rates and allowances on the HMRC website.
Income bands are different in Scotland and you can find those bands here.
National Insurance contributions
In addition to registering with HMRC for tax, you usually pay two types of National Insurance if you’re self-employed:
- Class 2 if your profits are £6,205 or more a year
- Class 4 if your profits are £8,424 or more a year
Class 2 is £2.95 per week and Class 4 is 9% on profits between £8,424 and £46,350, and 2% on profits over £46,250.
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!
National Insurance is charged in one go when you do your self assessment tax return rather than taken monthly. Read more about National Insurance on the HMRC website.
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:
- Cash books
- Mileage records
- Bank statements
- Receipts for business purchases
- Your P60s if you’re also employed
Read more about what business records you need to keep on the HMRC website.
How should I keep them?
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
Under MTD, businesses 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 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.
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.
How long do I need to keep financial records for?
You need to keep business records for at least five years after the 31st January submission deadline of the relevant tax year. So best to keep them for six I say!
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 2018 (if doing a paper return) or January 2019 (if doing an online return) you’re submitting financial information for the period April 6th 2017 until April 5th 2018.
You have to pay ahead
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.
HMRC take one payment by the end of January and another one in July. This is called ‘Payment on Account’ and you can read the exact specifics here.
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.
Where can I find out more?
- 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.
- You can also 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 a HMRC article outlining what you can claim under business expenses.
- Follow HMRC on Twitter for real-time updates and training on tax for small business owners.
- Here’s a list of the different online accounting platforms that allow you to keep your records digitally and submit your tax online.