The Complete Guide to Filing Your Taxes for the Self-Employed
The Complete Guide to Filing Your Taxes for the Self-Employed

For those newly self-employed, filing and paying your taxes is probably the part of running your own small business, that people least look forward to. You have got used to doing your own marketing, sales and accounts, but then, as it involves HMRC, paying your taxes adds another level of anxiety and challenge. However, if it is not done at the right time, you may receive a fine and you need to know the rules so you can budget and potentially reduce your total bill. In this guide we will take you through everything the self-employed need to know to filing their taxes…. And look on the bright side as it indicates you have successfully earned a wage for a whole year.

Understanding Self-Assessment

If you are a sole trader or a partner in a business partnership and have earnings above £1000, you need to submit a self-assessment for your taxes before every January 31st. A self-assessment is a declaration of your earning minus your allowable business expenses. Your earnings are not just what you get from your small business but could also include those from renting out property, savings and dividends.

If you are a limited company, it is a little different. For a limited company you pay through a company tax return but you will still probably have to complete your own personal tax return for your own salary and dividends.

Registering for Self Assessment

If you are self-employed and filing your taxes, you need to register for self-assessment with HMRC before the 5th of October in the second year of your business. If you do not you could be fined. To do so visit the registration page and submit your details.

If you’re a business partner the process is slightly different and you’ll need to register here.

When you register for self-assessment, HMRC will give you a Government Gateway user ID, which you can then use to set up your personal tax account. Then when you log in you can manage different elements of your tax affairs online.

Once you’re registered for self-assessment you’re then able to file your tax return online or on paper – but HMRC will eventually phase out paper tax returns under its Making Tax Digital initiative.

Getting Ready to Submit Your Tax Return

When you submit your tax information you should have organised all your receipts and expenses together.

This should not be something you do just before you submit. You should keep track of all expenses and invoices as they occur so that you don’t have to find them at the last minute. For example, you may neglect to download a receipt for an item and when you request a new one from the company, they are not willing to do it quickly or have a problem with their system. The result is that you miss an opportunity to reduce your tax bill.

You can keep track in something as simple as a spreadsheet or you can opt to sign up to a cloud software provider. There are numerous solutions in the market including Zoho Books and Xero among others. Whether, and which, solution you opt for depends on the complexity of your accounts.

In addition, if you take payments by card your app provider should allow you to create invoices and store them, making it easier to keep records.

Deducting Expenses

You need to keep those receipts because you are allowed to deduct the costs of running your business from your profits. There are costs you can deduct including office, travel, marketing, and business insurance. If you are using your own home as your office then you can also potentially deduct some of your heating and electricity costs, but on a proportional basis. You can find out about all the possibilities here.

Keep Records

Even though you are making a self-assessment, HMRC could ask to see your accounts at any time, and you are legally obliged to keep records for up to five years.

Possible Documents You Will Need

First and foremost you will need your unique taxpayer reference number which you got when you registered for self-assessment. Otherwise, you may need details of:

  • employment income (if you’re also employed)
  • dividends
  • partnership income
  • interest
  • rental income
  • foreign income
  • pensions contributions
  • Gift Aid
  • pension income
  • payment on account
  • redundancy lump payment or unemployment benefit
  • P11D
  • capital gains

Filling in Your Tax Return

You have the option to submit online or file a paper return. If you opt for the latter, you’ll need to complete form SA100 and the self-employed supplement form SA103. In the case of the former, you get an extra 3 months to complete it, but if you have not filed online before you will need to register and get an activation code. The code could take up to 10 days to arrive so make sure this is all done well in advance of the 31st January deadline.

After you have logged in follow the steps below:

  1. Check personal details – If you have changed your address update it here.
  2. Fill in the sections that apply to you – The system will adapt in response to your answers.
  3. Report on what you have earned – will also need other details of any employed income for that year.
  4. Add deductible expenses – As we have discussed adding your business costs.
  5. Double check and submit.

Paying Your Self-Employed Tax

When you submit you should get a reference number and confirmation. HMRC will calculate your tax. The deadline for paying is the same as for filing – January 31st – so it obviously pays to submit in advance. If you file late and you will get an initial £100 penalty, but this will build up over time.

Payment on Account

When you get your tax bill you will notice that it is roughly 1.5X your estimate. The reason is that HMRC wants you to pay in advance for the next year. It takes your bill for the previous year and splits it into two parts, one due on January 31st and another due on July 31st. This may seem harsh but remember you are already paying for the tax year that ended 9 months before. By asking you to make those payments the idea is that you are not left with too big a bill to pay at the end of the year.

Of course, this can be a surprise the first year, so you have to budget for it. HMRC will base your payment on the previous year’s tax bill so if you didn’t earn as much in the 2nd year, you can reduce it. To do so logging into your online HMRC account and clicking ‘Reduce payments on account’. Or, you can send form SA303 to your tax office.

Difficulty Making Payments

For self-employed filing taxes, the government made a number of concessions to defer payment with regard to the 2019/20 tax year due to COVID19. While there is no guarantee the same will apply to the 2020/21 tax year, you can look out for possibilities, but don’t plan for it.

HMRC tax return guidance

You can go to the website for guidance or call the Self Assessment helpline on (0300) 200 3310. But in previous years HMRC’s phone lines have crashed so make sure you leave enough time to get in touch with them if you need to.

About Hoof

Hoof’s payment solution has all the tools to help you win business and more efficiently manage payments. Its invoice and quotation software makes it easy to create and store invoices and therefore makes filing taxes for self-employed easier.