It is becoming more common to become self employed or to work freelance.You’d be mad not to want to, wouldn’t you? You are your own boss and all your earnings go straight to your bank account and are all yours…well, that’s the common misconception about being self-employed anyway. In reality, you still have to pay a portion of your earnings to our lovely friend the tax man and being self-employed means there are several pitfalls that are easily fallen into. Doesn’t seem so rosy now does it?!
Self Assessment
Putting aside issues of paying your own sick pay, sorting your own pension and not being certain of having a regular income, people who are self-employed also have to arrange their own tax payments in the form of a Self-Assessment tax form. These are completed once for every tax year so it is absolutely vital that during the year you keep detailed accounts of your earnings and outgoings. It may be worth thinking about recruiting a bookkeeper or accountant to help you with this because if you do this wrong or not on time, you run the very real risk of a hefty fine! With well-kept financial accounts, the Self-Assessment is straight forward to complete (relatively speaking!) and can be completed either online or on paper.
Registering with HMRC
When you are starting out as a freelancer or as self-employed you will need to register with HMRC. The number to register as Newly Self-Employed is: 08459 154515, alternatively it can be done through their website.
If it is likely you will not be earning a lot during the course of a tax year, it is possible that you will not have to pay tax as you are classified as a Low Earner but this unfortunately does not mean you get away with not filling out your Self-Assessment! As well as tax, there are National Insurance contributions to consider as well (unless you have opted out of these as a low earner). However, if you earn over £8,105 (in 2012-13) then remember not all that money you earned is yours!
This is where self-employed people can get into a real financial pickle! We find that a useful way to deal with having to pay tax at the end of the year instead of having it taken out of your pay packet every month before you even see it is to take it out every month yourself. First, check which tax bracket your expected earnings will place you in for the year, for example whether you will be taxed 20%, 40% or even 50% of your earnings. Then calculate what this amount is as a percentage of each month’s earnings and put this money every month into a separate high interest account. This way, at the end of the year you have the money to pay the tax man and also get to keep the interest you have earned on it! Everyone is a winner!