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UK Tax compliance requirements if you’re self-employed

Private Clients - 10 Aug 2017

If you have recently become self-employed, this has implications for your tax compliance obligations. When employed, tax is often not an issue with which you overly need concern yourself, since the money will automatically be removed from your pay under PAYE. In fact most individuals who are employed are not required to file a tax return. However, when self-employed, you must take the initiative to prevent yourself falling short on your tax obligations. Under UK rules you are required to file a UK tax return if asked to do so by HMRC and/or you will have a liability to tax. If self-employed a liability to tax will likely arise where your total income exceeds the personal tax allowance (£11,500 for 2017/18).

Are you employed, self-employed, or both?

Usually, discerning whether you are in employment or self-employment is simple. However, there is the possibility that you have stayed in employment while having become self-employed in a separate job. This can unhelpfully muddy the waters; fortunately, the HMRC website has an Employment Status Indicator tool enabling you to figure out your work status. If deemed to be employed then you should inform the employer of the need to operate PAYE.

Tell HMRC that you are self-employed

Once you have become self-employed, it is important to inform HMRC. You should register by 5 October following the end of the tax year for which you must file a tax return for. Each tax year is from 6 April until the next year's 5 April. Fail to register before the deadline, and it might be necessary for you to pay penalties, cautions the Money Advice Service.

VAT registration

Don’t forget that you may also need to separately register for VAT. This is completely separate to filing your income tax return. You must register if your turnover exceeds the specified threshold (£85,000 for 2017/18).

Have the right information at hand

After having registered with HMRC and its online services, you are nearly in a position to start completing the tax return. Before doing that, you should ensure that you have gathered the relevant documents including details of your income and expenses.

There are other details that you should have, like your national insurance number and unique taxpayer reference. However, you can take heart that, for online self-assessment tax returns, HMRC has started adding certain details, including those of state pension and class II NI contributions, on the taxpayers' behalf.

Filing deadlines

If you wish to file a tax return in paper format then you must submit this by 31 October after the end of the tax year. Returns submitted after this must be sent in electronically by 31 January after the end of the tax year. Please note if you are planning to prepare your return electronically yourself then you will need to register for an activation code with HMRC. It currently takes around three weeks to obtain this code meaning that you cannot leave your tax return filing to the last minute.

Maintaining good records for when you file

How much money is spent and how much arrives, and at what times? You will need accurate records of all of this if you wish to correctly calculate your tax obligations. We would advise that you pull together these records on a real-time basis. This approach will ease the occasion of tax filing, when you won't need to desperately fumble for all of your receipts, invoices and bank records.

Keeping records

Details of self-employment income and expenses needs to be maintained much longer than for other tax records. Such records should be retained for five years following the 31st January after the tax year concerned in case HMRC wish to check them.

What is deductible?

Do not assume that all the expenses of your business are tax deductible. There are special rules as to what can be deducted which should be reviewed and many expenses may be disallowed. Capital expenditure also cannot be deducted but you may be able to claim an expense for ‘Written down allowances’ (similar to depreciation).  

Paying your tax

As a self-employed individual you will need to maintain the funds to pay your own taxes (and National Insurance). Financial discipline is therefore required. Tax is due with your tax return on 31 January after the end of the tax year. Most self-employed individuals will also become liable to make payments on account (a form of advance payment). Payments on account when due are payable in two instalments due on 31 January during the tax and 31 July immediately after the tax year. Each of payments are calculated by reference to 50% to the prior year tax liability. Many taxpayers are surprised when they first become self employed by the size of their first tax payment due on 31 January. This will comprise two components, the tax liability for the year the self-employment began and a 1st payment on account for the current tax year.

Don't be afraid to seek professional assistance

The myriad of tax implications that can arise when you leave a post of employment for a self-employed position could easily confuse and daunt you. However, getting on top of your tax obligations can be easier when you seek specialist assistance.

Whatever your tax obligation, it isn't necessarily hard for you to make sure you are compliant. Our private client team has extensive experience of providing tax compliance services for self-employed individuals.

Please review our website to learn more about our tax compliance service or contact us to arrange a consultation.

 

 

 

 

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