One of the main benefits of working for yourself as a sole trader is the freedom and flexibility that comes with it. The downside – just in case you didn’t know about it already – is that you have to manage your own tax. Generally, your income tax and National Insurance isn’t automatically deducted from each month’s pay once you’re self-employed. You need to fill in a tax return before the end of January each year (or the 31st of October if you file a hard copy), notifying Her Majesty’s Revenue and Customs – more commonly known as HMRC – of your earnings and making the correct tax payment. It can prove a difficult process, and getting it wrong can mean you incur hefty fines. To prevent that, read on and discover a few tips to help you fill out that pesky form and pay your taxes in a way that works for you.
What Can I Claim Back?
Early on, many sole traders are unaware of the specifics of their expenses. Yes, travel and equipment can often be claimed back at the time you file your tax return, but did you know that you can also claim for certain kinds of training and the ongoing costs inherent in developing your skills for your new business? It’s not always the case, but it’s definitely worth doing your research to see whether the course you’re considering might fall into the category of a tax allowable expense.
Also, good news for those who work from home – you can reclaim a certain portion of your utility bills if your gaff is also your office. This is called a “use of home” allowance, and the amount of usage that can be attributed to your work is calculated according to a number of aspects, including the number of rooms in the proper you commonly work from and the cost of your bills in the first place.
When Should My Year End Fall?
While the tax year is generally accepted to finish on 5th April – with many self-employed individuals giving themselves a year end of the 31st of March to ensure their self assessments are completed in time – other people prefer to arrange a wider window to do so. There is a greater amount of flexibility allowed than many realise, however, as you can set your year end pretty much as early as you want, meaning you have plenty of time in which to ensure your tax is paid.
What About Budgets?
You absolutely should set aside a proportion of your income ready to be paid as tax come the end of the financial year, and you should do it as soon and as often as you can. If you can estimate your average income per month, it’s definitely worth arranging a relevant amount of that to be saved – perhaps in an account opened specifically for such a purpose – so that you can accumulate your tax as the year goes on and you aren’t caught off guard when the time comes to pay HMRC.
Are There Refund Possibilities?
If you’ve only just become self employed, and you were in full time employment until part way through the year, there may be an amount of PAYE tax that you’re owed. It’s definitely worth checking this, as the money you’re missing could prove very welcome when it comes to paying your tax as a sole trader, or simply covering immediate expenses for your work.
What if I Make a Loss?
It’s normal to make a loss during your early years of trading, as there can be a number of costs involved in striking out on your own for the first time. However, did you know that there are allowances available when it comes to relief for losses made by sole traders and freelancers? You may be able to offset yours against previous years’ earnings, in a number of different ways that you can discuss with HMRC. You can reduce your taxable income by the size of the loss you’ve made, and, depending on the amount of tax you’re expecting to pay, you could claim up to 40% in refunds. There is also the option to carry your loss forward into the next financial year and set it against any future earnings.
If you’re just starting out as a freelancer or sole trader, tax is pretty much the only inevitable dark cloud that sits on your otherwise broad horizon. Once you’re on top of it, the world is your oyster, and you can choose to put down roots wherever you wish. If you’re looking for a location to call your base, get in touch with Signature Works today on 0151 558 1566. We own excellent flexible office space in Liverpool, and would be thrilled to discuss your requirements with you.