For some people new to contracting, becoming self-employed might be the first time that they have had to pay self-assessed tax. Filling out a tax return does not need to be a traumatic experience though – with a bit of planning, and a good sense of personal finance, it can be a relatively simple and even painless experience.
There are various pitfalls to avoid and good practice guidelines that you should follow. Here are our top tips for how you can prepare for self-assessment.
Know your deadlines
If you want to file your tax return as a paper copy – and this is sometimes necessary for people with complex tax situations – you must file by October 31. If you are happy to file an online tax return, you have until January 31. But beware that HMRC’s website will be flooded with people who have left their tax return to the last minute and it does not always cope with the stress.
Get your paperwork in order
If you’re new to contracting and recently finished working, make sure you have your P60 or P45. You’ll also need details of bank account interest, investment profits and losses, and of course any dividends you may have drawn down if you have a limited company or personal service company.
Figure out how to deal with other income
If you have invested in a rental property and have any income from tenants, you’ll be able to use your property losses – mortgage interest costs for some landlords, repairs, estate agent fees, insurance etc – to offset any income you make.
Put money aside to prevent cashflow problems
If you were a PAYE employee, you didn’t need to worry about tax as it was deducted from your monthly salary cheque. But as a self-employed person you will need to pay both income tax and national insurance, and possibly VAT if you earn enough. Although you should be able to maximise your income through various tax efficiencies available to self-employed people, you will – hopefully – earn enough to end up with a substantial tax bill. Estimate how much you think you’ll pay and set money aside every month so that you don’t have a tax debt at the end of the year. HMRC sometimes asks for payments on account – advance tax payments based on what it expects you to owe in the forthcoming financial year.
Watch out for fake tax websites
HMRC has taken action to shut down more than 22,000 bogus websites in the last two years, so double check the website URL before you enter any details.
Do make pension contributions, especially if you are a higher rate taxpayer
You get an automatic tax relief of 20% if you make any pensions contributions. Higher rate taxpayers should pay close attention to their pension contributions. Since they pay tax at 40%, they can reclaim an additional 20% of tax relief on pension contributions.
Keep a record of your gift aid donations
Higher-rate taxpayers can also claim tax relief on gift aid, as this is also calculated only at the 20% basic rate.
Be meticulous about your expenses
Every business expense you make needs to be accounted for so that at the end of the year you can make proper deductions from your tax bill. Travel and obvious expenses – like a new laptop – are easy enough, but there are other options. If you work from home, you can work out how much of your insurance, gas and electricity, and maintenance are related to your work.
Consider whether you need an accountant
If you’re using an umbrella company, you may be happy to do your own tax return. If you have a personal service company, you may find that an accountant is a worthwhile investment. Some services that we offer include preparation of a self-assessment return.
Whatever you choose for your life as a contractor, get the best advice – contact our team today for a free consultation.