A guide to understanding and filing self-employed tax returns in the UK
Understanding and filing your self-employed tax returns in the UK is not only crucial, but can also save you from unnecessary penalties. Not only does it ensure compliance with the law, but it also allows you to maximise your deductions and minimise tax liabilities.
Are you self-employed and finding the tax return-filing process daunting? You’re not alone. But don’t worry, through this comprehensive guide, Sleek will help you navigate the intricate process of filing self-employed tax returns in five easy steps.
Before you start: understand if you are self-employed
Being self-employed means that you work for yourself, run your own business, or carry out freelance work. It offers flexibility, but it also comes with specific tax obligations and considerations that differ from those of traditional employment in the UK.
Determining your employment status is vital for tax purposes. Employment status can affect the taxes you pay, your entitlement to benefits, and the legal responsibilities you have as a business owner.
Eligibility criteria
According to the government, you are self-employed if you meet one of the following criteria:
- You run a business for yourself and take responsibility for its success or failure
- You sell goods or services to make a profit
- You become a partner in a business partnership
- You set up your own limited company
Tax obligations for the self-employed in the UK
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1. Registering as self-employed
Once you’ve established your self-employed status, it’s crucial to register for Self Assessment. You can register as self-employed online through the official HM Revenue & Customs (HMRC) website.
Deadlines for registration
The deadline to register as self-employed is 5th October 2023, although we advise that you register as soon as you start your business or commence your freelance activities. If you don’t register by the deadline in your business’s second tax year, you could be fined.
Want to register as self employed? If so, check out our article “Register as self employed in the UK: the ultimate guide“.
Looking for an accountant to manage your tax return? Our experts are here to help you.
2. Maintaining accurate records as a self-employed person
Good record-keeping will help ensure that your tax return filing process goes as smoothly as possible, that you are able to report your income and expenses accurately and that you claim all the deductions and reliefs you are entitled to.
Accurate records also enable you to monitor your business’s financial health and make informed decisions.
To maintain accurate records, we recommend that you keep on file the following information:
- Sales and income
- Business expenses
- VAT records if you’re registered for VAT
- PAYE records if you employ people
- Records about your personal income
- Grants, if you claimed through the Self-Employment Income Support Scheme
HMRC recommends that you keep these records for at least five years.
How to effectively maintain records
Maintaining records may seem like a daunting task, especially for freelancers and business owners who would much rather focus on getting other work done.
The best way to ensure your records are up-to-date is to hire an accountant to keep track of your invoices, expenses and other documents throughout the year, and file your tax return for you ahead of the deadline.
Here at Sleek we are making it easier and more affordable for small business owners and solopreneurs to do just that, thanks to our all-in-one accounting services and a slick and seamless accounting platform designed to make the entire process easy and stress-free.
3. Calculating your income and allowances
Your self-employment income includes all earnings from your business activities, freelance work, contract work, or any other self-employed ventures.
However, there are certain expenses, profits and contributions that you will be able to deduct from the amount of tax that you owe. These are outlined below.
Allowable expenses
Allowable expenses are costs incurred in running your business that can be deducted from your income, reducing your taxable profits. Examples of expenses include:
- Office costs (eg. stationery and phone bills)
- Travel costs (eg. fuel, parking, train and bus fares)
- Clothing expenses (eg. uniforms)
- Staff costs (eg. salaries and subcontractor costs)
- Things you buy to sell on (eg. stock or raw materials)
- Financial costs (eg. insurance and bank charges)
- Costs of your business premises (eg. heating, lighting and business rates)
- Advertising or marketing (eg. website costs)
- Training courses related to your business
If you work from home, you may also be able to claim a proportion of household utilities, such as heating, electricity, Council Tax, mortgage interest or rent, and internet and telephone use. You can use simplified expenses to more easily calculate flat rates for these expenses.
If you run your own limited company, you will not be able to deduct allowable expenses from your income tax. Instead, you will deduct these business costs from the profits of your business before tax.
Stuck between choosing to start sole trader or limited company? We have an article that could help you make your decision.
Capital allowances
Capital allowances are another kind of tax relief which allows you to deduct the value of certain items from your profits before tax. The kinds of items you can claim capital allowances on include:
- Equipment
- Machinery
- Business vehicles
- Renovating business premises in disadvantaged areas of the UK
- Extracting minerals
- Research and development
- ‘Know-how’ (intellectual property about industrial techniques)
- Patent rights
- Dredging allowances
- Structures and buildings
If you’re a sole trader and make less than £150,000 a year, there is a simpler system available to claim deductions on capital allowances called cash basis.
4. Submitting your Self Assessment tax return
Once you have figured out your profits and allowances, you’re ready to submit your Self Assessment tax return.
The Self Assessment tax return is a vital component of filing your taxes as a self-employed individual. It allows you to report your income, and claim allowable expenses and deductions. Filing your tax returns on time is crucial to avoid penalties and ensure compliance.
The deadlines for filing tax returns vary depending on whether you submit your return online or by paper. The upcoming deadline for paper tax returns is 31st October 2023, and for online tax returns, it is 31st January 2024.
Late filing of your Self Assessment tax return can result in a £100 fine if it is up to 3 months late, or more if it’s delayed further.
Looking for an accountant to manage your tax return? Our experts are here to help you.
5. Paying Income Tax and National Insurance contributions
Taxable profits are the remaining income after deducting allowable expenses from your self-employment earnings. You’re required to pay income tax on these profits.
After you submit your Self Assessment tax return, HMRC will calculate the amount that you owe and you will be responsible for paying this by the deadline of 31st January.
Here is the breakdown of the taxes you will pay:
Income Tax
Income Tax is calculated based on your profits for the tax year.
The first £12,570 you make is considered your Personal Allowance and is tax-free. From then on, you will pay in bands:
- 20% on profits between £12,571 and £50,270
- 40% on profits between £50,271 and £125,140
- 45% on any profits over £125,140
National Insurance contributions
Additionally, self-employed individuals are responsible for paying National Insurance Contributions (NICs) to ensure eligibility for certain benefits, such as State Pension, the NHS and unemployment. There are two types of NICs relevant to self-employment that you will pay:
- Class 2 contributions: These are fixed weekly payments.
- Class 4 contributions: These are a percentage of your taxable profits.
Late payment penalties
In the event of late payment of your taxes, HMRC may charge you interest and you may also have to pay a penalty, so it’s important to ensure that you pay your taxes by the deadline.
Conclusion
Throughout this guide, we’ve covered how to track your expenses, what allowances are available and how you should go about filing a tax return in the UK. We emphasised the importance of accurate record-keeping, understanding self-employment income, maximising deductions, and fulfilling your tax obligations.
Need help completing your Self Assessment return, managing your accounting and ensuring you are maximising your allowances? Here at Sleek we help small businesses and self-employed individuals, offering expert advice and comprehensive solutions, so that you can stop worrying about your taxes and start focusing on what matters.
Find out more about how Sleek can help you manage your tax return here.
If you’re unsure about any aspect of your taxes or need assistance with financial tax planning, consulting tax advisors at Sleek will save you time, money, and potential headaches. At Sleek, we provide accounting services to aid you with an efficient and seamless tax process.
FAQs
If your total income from self-employment is below the trading allowance threshold of £1,000, you may not be required to file a self-employed tax return. Learn more about tax-free allowances on trading income here.
You can register yourself as self-employed on the official HMRC website.
Yes, late payment of tax liabilities can result in penalties and interest charges imposed by HMRC.
