Tax basics for self employed individuals are crucial for managing finances effectively. Unlike employees, we handle our own tax affairs, meaning we must register with the tax authorities, keep accurate

records

, and file tax returns on time. Additionally, we need to calculate tax payments correctly to avoid penalties. Because financial planning is essential, understanding these obligations helps us stay on track.

Key Tax Considerations

Self Assessment and Deadlines

Self-employed individuals must complete a self-assessment tax return each year. Generally, the deadline for online submissions is 31 January, while paper returns must be submitted earlier. However, missing deadlines leads to fines, making it vital to stay organised. Consequently, setting reminders prevents last-minute stress. Furthermore, filing early allows us to plan tax payments efficiently.

Allowable Expenses

Claiming allowable business expenses reduces taxable income, helping us manage finances efficiently. Accordingly, costs such as office supplies, professional fees, and travel expenses qualify as deductions. However, expenses must be wholly and exclusively for business purposes. Because proper documentation is necessary, keeping receipts and maintaining records ensures compliance. Moreover, tax rules change, so checking for updates helps maximise deductions.

National Insurance Contributions (NICs)

Paying NICs is mandatory for self-employed individuals. These contributions impact state benefits and pensions. Generally, we pay Class 2 and Class 4 NICs, depending on annual profits. Additionally, checking the latest thresholds ensures accurate calculations. Because tax liabilities vary, professional guidance helps us avoid surprises.

Managing Tax Payments Efficiently

Setting Money Aside for Taxes

Instead of waiting until deadlines approach, setting aside money regularly prevents financial strain. Similarly, using a dedicated tax savings account helps us manage payments without disruption. Additionally, planning ahead reduces stress and ensures smooth cash flow.

Using Accounting Software

Accounting software simplifies tax management. Besides automating invoicing and expense tracking, it provides real-time insights into our financial position. Furthermore, software like Xero improves accuracy and efficiency. Consequently, using digital tools saves time and reduces errors.

Final Thoughts

Tax basics for self employed individuals require careful planning and organisation. Because tax rules can change, staying informed is essential. Moreover, professional advice helps optimise tax efficiency and compliance.

For expert insights and practical tips, listen to the I Hate Numbers podcast. Additionally, register for our webinar –A Stress-Free Tax Return: Guide for Freelancers and the Self-Employed.

As the UK tax season draws to a conclusion for 23-24, I thought it worthwhile to present a podcast on I Hate Numbers about tax basics for the UK self-employed. Hello, welcome to the I Hate Numbers podcast where my aim is to make tax and accounting simple and stress free. Now today, I'm going to be diving into the basics of tax for the UK self-employed.

If you happen to be running your own business, whether you're freelancing, side hustling, this episode is for you. Now tax may not necessarily stimulate the heart rate, may not be the most exciting topic, but getting it right will save you money. It will reduce your stress and anxiety and potential problems with our friends at HMRC.

So grab yourselves a drink of choice, get comfy, and let's crack on with self-employment tax.

In this episode, I'm going to be covering what it means to be self-employed, registering for self-employed, and yes, you have to register if the criteria fit, the records that you need to keep, how the tax is worked out and how much you need to pay, expenses that you can claim. I'm also going to flag up something called making tax digital.

We're going to talk about deadlines, some tips to share with managing your tax, and some final concluding thoughts. Firstly, what does it actually mean to be self-employed? What does that term refer to? Now, putting on my HMRC hat, I don't work for them, but having been involved with them, working for clients with them for over three decades here, well, if you work for yourself, rather than being employed by somebody else, what we might call a PAYE employee,

you're classified as self employed. You could be called a sole trader. You could be called a freelancer. But essentially, you're running your own business. You're not running through a limited company. You could be in partnership with somebody else. But the key thing is in this case, you as an individual are responsible for your own taxes.

Ultimately, you got the responsibility of making sure your tax return is sent on time. Ultimately, it's down to you to pay that tax. And also, you've got to remember that you have the responsibility of finding the money to pay the tax as well. You don't have an employer who's going to step in and sort it out for you.

Let's consider the idea of registering as self-employed. Now, it's really key and important here that if you're earning more than 1,000 worth of sales or revenue, over a 12-month period, then as far as HMRC is concerned, you need to register with them as a self-employed individual. Now that 1,000 by the way folks is an annual figure, so if you start working for yourself on the 1st of October, which is approximately halfway into the tax year, and you've earned in terms of sales say 6,000 pounds, on an annual basis that's 1200 quid, you need to register. Now the registration is normally done online via the HMRC website eventually you will receive what's called a unique tax reference a UTR if you want to go into abbreviations and when you do register for self employment make sure you tick the box that says the reason you're doing so is because you're self-employed. This tax reference this 10 digit number sticks with you pretty much throughout your self-employed journey. Keep it safe. It's vital for when you submit your return, but also when you communicate with HMRC, they normally like to have your UTR or perhaps your National Insurance Number.

Now, self-assessment is the system used to report your income, work out the tax that you owe. Now, registering and having to submit a tax return doesn't mean you owe tax, but it means that HMRC want to know what's going on. Now the deadline to register, and tax always involves deadlines and dates, is the 5th of October after the end of the year in which you started trading.

Ideally, don't delay, get your house in order and get that reference. We're now going to look at the idea of keeping records. Good record keeping, and certainly in the tax situation, is your best friend. Don't look at it as a chore - look at it as something that's going to really serve you well. You need to treat your income and expenses anyhow as a good business discipline, but you also need that so you can work out how much profit you've made and how much of that profit is going to be subject to tax.

Now this means you've got to keep invoices, receipts, and bank statements. Now you can go old-fashioned way and keep them in a shoebox, as some form of leave your art file. You can go digital. What I would thoroughly recommend people to embrace is the idea of having a digital accounting system that does all the heavy lifting, and it can store those receipts.

You don't have to actually keep them physically, you can store them in your software. I want to move on to the idea about good record keeping and why it's important. Now HMRC do impose an obligation on taxpayers that you must maintain adequate records to verify what goes into your tax return. HMRC also reserve the right to check your records if they suspect or are not quite sure of something that you've put on your tax return.

In this case, digital tools like cloud accounting will really serve you very well. Obviously you can keep spreadsheets. It's not mandatory to have digital accounting but on the grills in the landscape, we have something called making tax digital. Digitisation, the earlier you can do it, is going to work out better for you.

Clarity and accuracy are your watchwords. Obviously, it's going to come about how do you figure out how much tax you've got to pay. Now, as a self-employed person, you pay tax. It's called Income Tax and National Insurance. They're both taxes, but they've just got different terms. And those are levied on your tax profits.

In general terms, that's your income minus the allowable expenses. So if you're a freelancer, the fees that you charge your clients, less the cost of any materials that you buy in, less the cost of business travel, the difference would be your profits. If you're somebody who works in the building industry, and you've got to buy tools, you've got to travel to see clients, and on that business travel you've got also food that you buy, on that route, subsistence as you might call it, overnight accommodation, all of those are expenses and they will be offset against the income that you charge your clients.

Now tax is based on how much taxable income you have and where you fall into what they call tax bands. Now tax rates change all the time, but these are the rates currently for what's called the 24-25 tax year. Now folks, 24-25 means, for now, the tax year begins on the 6th of April 2024, and it finishes the following 5th of April 2025.

That's a tax year. In the UK, our tax years are determined by starting on the 6th of April and ending the following 5th of April. Other countries around the world may have what might seem sensible dates when they go 1st of January to 31st of December, but for now we have that 6th of April to the following 5th of April.

Now for the 24-25 tax year, if your total income, and let's assume you've got no other income apart from self employment, is up to and including 12,570, what's called your Personal Allowance. You don't pay any tax at all. Certainly no income tax. We'll talk about National Insurance in a few moments. If your taxable income falls between 12,571 and up to 52,070, you'll pay 20 percent on the income within that band.

You're also known as what's called a Basic Rate taxpayer. Now, if you happen to be doing very well, And you're still staying as self employed, which your profits go over that 52,070, then you pay 40 percent on the excess up to and including 125,140. And lastly, if whatever reason you stay self-employed generating that level of income, then you're paying tax on the excess of 45%.

As a footnote, certainly if I came across a sole trader, self-employed client who was generating that level of income. Unless there are good reasons not to do so, then I would definitely be considering going via a company structure. Be aware, by the way, if you happen to be a Scottish taxpayer, then the tax bands are slightly different, so make sure you're aware of what they are.

There are different rates on income tax for Scotland compared to the rest of the United Kingdom. Now, I mentioned National Insurance Contributions. Let's go through those. Now, in addition to income tax, you'll also have, potentially, National Insurance and there are two classes or two types of National Insurance.

There's a small one called a Class 2 and if your profits are over 12,570, you pay a flat rate £3.45 per week. If it's below that level then you're either going to get National Insurance credited to you or you can volunteer to pay them. Now please note, that National Insurance that you're paying out of Class 2 is the one that goes towards your state pension and I would always recommend clients to do a state pension forecast to see where their National Insurance records are and also potentially any National Insurance based benefits.

The other type of National Insurance you'll have is called a Class 4. Now, again, this is based on taxable profits. If you have profits up to 12,570, nothing is due. Anything over 12,570, you've got a 6 percent that's charged. Now, as we're coming to this part of the podcast, I’m going to now talk about expenses that you can claim.

And this is just a snapshot of what you can claim. Now, tax is based on profits, not the fees that you charge, not your turnover, not your sales. So what that means is whatever you invoice, whatever you charge your clients, you can take off allowable business expenses. The general strapline is you deduct what's called wholly and exclusively for the purposes of trade.

Now, the more deductible expenses include things like office costs, working from home, business-related software, business travel. That could be train tickets, business trips, via bus, if that's your thing, if that's your jam, mileage, fuel, a whole mishmash of stuff. You could also deduct things for equipment, laptops, marketing costs, professional fees, cough cough, like accounting fees, business insurance.

Now if you work from home, you can also claim a proportion of your household bills or use an HMRC simplified rate. Let's flag up something called making tax digital. Now, HMRC, it's been on their roadmap for some time, are moving towards something called digital tax reporting. We'll give it a strapline name, it's called Making Tax Digital.

Now, effectively, most self-employed businesses will need to use software Because those records be required by HMRC on a quarterly basis. Watch out for more updates on this topic. It comes into effect April 26th, but I would highly recommend that we gear ourselves up for it in advance. And making tax digital not only will serve you well for submission of accounts to HMRC, but it's also a good business discipline to get into to have your record digitised.

Now the last couple of things I want to look at is the actual deadlines. And here's the key dates you typically need to be aware of. The 31st of January is the deadline after the end of the tax year to file your online tax return and pay any tax that you owe. Failure to do so will trigger a fine. The following 31st of July, if appropriate, you've got to make upfront payments towards the following year called Payments on Account.

And on the 5th of October, it's the deadline to register as self-employed, as we mentioned earlier, if you started trading in the previous tax year. As with all things tax related, missed deadlines, interest and penalties will be imposed by HMRC. So set up a reminder on your calendar and that's going to effectively minimise the likelihood of you getting into problems.

Now some final thoughts. One of my tips to share with clients is save the money as you go along. So every time you invoice a client, put a proportion away into a separate bank account, a separate savings account, to save towards the tax bill going forward. As a rule of thumb, without knowing the level of expenses, I would say typically you're going to put 15 to 25 percent away.

It may end up being too much, too little, but at least you're saving as you go along. Ideally, have a separation of bank accounts. Keep one account for personal, one account for business. Try to separate them out, so you don't actually mix and match and merge them together. It's a good business discipline, and psychologically, you can see how your business is operating.

Planning. One of my favorite things in life. Plan ahead. Don't wait until the last moment to file your return. The earlier you do it, the better you'll know. You'll understand what you owe, you'll understand whether you've got the funds to pay that, and it also reduces anxiety tremendously. And obviously, I would say, get help.

So, whether it's ourselves or somebody else, a good accountant or tax advisor will save you time, save you stress, save you money, and understands, because of the training and everything else that's done, where you can optimise your tax savings, but most importantly, is to make sure that job is done effectively and correctly.

Now what's my concluding thoughts? Understanding and managing your tax as a self-employed individual is key to running your business. Good planning, solid record keeping and staying on top of deadlines, you will reduce your stress levels and keep more of what you earn. And I hope you found this episode useful.

Please subscribe to the I Hate Numbers podcast, share it with a business owner. If you do need personalised tax advice, get in touch. We're here to help. Thanks for listening and until next time, plan it, do it, profit.

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