Need-to-know tax information for freelancers
Freelancing can be a fun and rewarding venture but it’s essential to understand the financial side of being a freelancer. You have a unique financial situation, and it’s easy to get overwhelmed with the legalities. You’re not just the boss, you’re your own employer too.
EasyBooksdiscuss the mostimportant tax information to take into account if you are a freelancer or looking to go self-employed, including the below:
- Being the Boss of Your Own Tax
- Making Tax Digital (and Easier)
- Let HMRC Know
- Budgeting for Tax
- The Home Office Deduction ,
Being the boss of your own tax
You are your own boss and you operate from your own rules, which is great until tax time comes and you have to abide by the Taxman’s rules instead. Even if you haven’t received your client payment, it’s your responsibility to pay in full and on time to avoid any fines.
In addition to traditional income tax, self-employed individuals are responsible for paying a tax created just for them. The amount also includes the employer portion of those taxes, as since you’re self-employed, you’re considered both an employee and an employer.
The tax year runs from 6th April to 5th April. If you register too late, you might be liable to pay penalties which are definitelysomething to avoid when trying to run a sustainable and profitable business.
Making tax digital (and easier)
The UK government has launched a new scheme - Making Tax Digital. VAT-registered businesses with a taxable turnover above the VAT threshold are now required to use a digital service to keep tax records digitally.
Although the deadline date is in the debate, it’s no excuse to delay making your tax digital. There’s never been a better time to make the change.
There are several benefits to paying tax digitally via digital software or apps. For starters, you won'thave to rifle through receipts and documents. Everything you require financially will be accessible at the touch of a button in your pocket. Filing cabinets will be a thing of the past and all your lengthy financial processes will be a distant memory.
Let HMRC know
We recommend that you let HMRC know immediately when you start trading from your new self-employed business. If you’re not exactly sure how are classified, you can find out by using the government’s handy employment status checker.
Typically, you need to complete a Self Assessment and send the tax return if you’re self-employed as a sole trader and earned more than £1,000 in a year. There’s lots of useful information on what to do with tax returns when self-employed and it’s important to take time to familiarise yourself with the process.
Budgeting for tax
When you’re freelancing, it’s your responsibility to pay taxes. It’s best practice to budget for this and many opt for paying tax quarterly to avoid a large sum of money for which you haven’t budgeted. The tax-free personal allowance is the same for self-employed and employed people, so for 2020/21, you can make up to £12,500 before you need to pay taxes.
When you’re a freelancer, budgeting is notoriously hard as your income is never guaranteed and can differ from month to month. It’s recommended to have an additional account for emergencies, so you can work without worrying.
Another benefit to having a second account is being able to put aside your tax money if you do want to pay it all at once.
The home office deduction
Many freelancers can qualify for a home office deduction, however, there are lots of tricky rules and regulations to follow in order to comply. These include:
- Being able to show your particular section or room is reserved just for business and personal activities must be excluded from that area.
- Regular use is mandatory, or you will not qualify if you use it only occasionally.
- Let children or anybody else use the dedicated home office space, and you violate the terms and conditions.
- You can also claim expenses for things such as internet bills and utilities as well as any computer software you renew regularly in the business. ,
Simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs. It may not work for all businesses but you should investigate it in your particular circumstances.