Self Assessment for the Self Employed – Everything you need to know
Entering the world of self employment can often be perceived as a gruelling, high risk and admin heavy way of life. For many individuals looking to set up a limited company start-up or go it alone as a sole trader, there is always a common concern – “now I have to do my own self-assessment”. The Accountancy Solutions have been tax accountants for sole traders and self-employed persons for over 10 years, and in that time we’ve helped multiple companies and sole traders get to grips with the self-assessment system. Yes, it’s daunting to take on without any prior experience or knowledge, but ultimately if you follow the right guidance and work with your accountant – it’s very straightforward. In order to help sole traders and self-employed individuals, we’ve put together our clear, easy to read and straightforward guide to completing your self-assessment.
What is a Self-Assessment?Self-assessment is a HMRC system used to calculate and collect income tax. Traditionally, an employed individual has their tax deducted automatically each month, but self-employed or sole-traders have to proactively report their income to HMRC in order to make sure they are paying a fair taxation value. The self-assessment is viewed as a serious process for self-employed workers to follow as delays in paying the correct tax could get you in trouble with the HMRC. The responsibility to report income and tax lies solely on the individual. If tax is paid late then the HMRC charges interest on the tax from the day it was due. HMRC can also apply 5% surcharges if any of this tax is unpaid by the 28th February after the end of the tax year. As well as this, there is an automatic penalty of £100 for late payments, so this can very quickly rack up as an expensive mistake to make.
Do I have to do my self-assessment by myself?Thankfully, many individuals are able, and choose, to elect a tax accountant to help them prepare their self-assessment. As accountants in Birmingham and London, we work across multiple industries and businesses to help prepare individual’s taxation returns.
First time undertaking self-assessment?If it’s your first time undertaking your self-assessment we recommend researching and reading about the process in advance. It is often hugely beneficial to speak to an accountancy firm like ourselves, as the initial cost may be more cost effective than the time spent trying to undertake it alone. For users who haven’t submitted a self-assessment before you will need to register online with HMRC. After which you will receive a 10 digit Unique Taxpayer Reference number (UTR). You will also be enrolled for self-assessment online when you register with HMRC. Within about 10 working days you should receive an activation code in the post that will let you complete your set up on the HMRC system.
What’s the difference between a sole trader and a self-employed individual using a limited company?
- Sole traders run their own business as an individual and are self-employed.
- Sole traders benefit in that they are able to retain all their profits after tax has been paid on them.
- However, a sole trader is personally responsible for any losses from the business.
- Furthermore, as a sole-trader you cannot be registered as your own employee (which may be preferable for tax arrangements).
- Sole traders are able to withdraw cash from their business without any tax restrictions
- Sole traders can only benefit from a personal pension
- Sole traders, whilst they have to prepare a self-assessment, do not require to return accounts annually
Self-Employed under a Limited Company
- A limited company is a separate legal entity to its directors, shareholders and employees
- An individual who is using a limited company is a shareholder of that company
- There are more legal protections granted to a self-employed individual as a shareholder in a limited company than a sole trader
- Though not automatically classed as an employee, the individual can benefit by setting up a payroll scheme to optimise tax arrangements
- Limited companies are subject to corporation tax on taxable profits, these are lower than personal income tax rates. Shareholders can set up a salary (but are subject to PAYE and NICS contributions) scheme and can instead opt to receive profits via dividends. This process can allow for most cost efficient tax arrangements.
- Individuals using a limited company structure must prepare annual returns for their business as well as their own personal self-assessment. The time and skill required for undertaking this can be more arduous.
- Using a limited company structure, an individual can gain more via a company pension scheme as supposed to a personal pension
Paper self-assessment vs. Online self-assessmentYou have a choice how you submit your tax return – you can either submit it as a paper tax return (which tends to have a deadline of the end of October) or an online self-assessment which traditionally allows you an additional 3 months to submit.
Paper tax return
- If you’re trying to file your tax return using the paper option, make sure you give yourself plenty of time. Some returns may require additional paperwork or extra forms, so make sure you check you have everything you need well before the deadline.
- Create a checklist of all the documentation that is required – if you’re an employee at your own company, ensure you have a P60 and P11D (your PAYE notice coding)
- Ensure you make a copy of your paper tax return as well as proof of posting. If HMRC claim you haven’t sent it to them in the post, you have both a copy and proof of postage to rely on, otherwise you risk a potential penalty
- Ensure you’ve listed asset sales for the year that could be liable for capital gains tax
Online tax return
- The main advantages of submitting your tax return online include:
- Longer deadline to submit
- Tax is calculated automatically so you avoid the potential for erroneous calculations
- The online HMRC self-assessment system is much easier to navigate as it automatically removes sections that don’t require your attention thereby reducing the likelihood of mistakes
- Online self-assessments can be saved as you go, meaning you don’t need to undertake tackling it in one sitting
- Reassurance via instant confirmation of receipt means you don’t have to worry about your return being “lost in the post”
- Faster repayment if HMRC owes you any money post-submission
- Importantly, if you want to submit online you’ll need to register in advance. Be aware that the registration process can take seven days as you’ll require an activation code to arrive in the post
Understanding National Insurance ContributionsHMRC currently employs a two-tier system for National Insurance for self-employed individuals:
- If your profits are less than circa £8k, you will be liable for Class 2 NI worth £2.80 a week. From 2017 this will be abolished and Class 4 NI will be increase by 2% by 2019 subsequently.
- If your business profits are more than this then you will need to pay Class 4 NI. Class 4 NI is 9% of your profits up to £43,000 and 2% above that.
Keeping accurate financial recordsEnsuring that your business retains accurate and robust financial records is absolutely crucial if you’re self-employed. Having clear, structured and accurate records of sales and expenses will make for less work when it comes to self-assessment preparations.
- Receipts for expenses, invoices, bank statements and contracts should all be locked away safely. If you can, try store your records in a fire proof and water tight container to avoid losing all your information in the unexpected event of a fire or flood.
- Take benefit of online finance software such as QuickBooks or SageOne. These will not only let you raise invoices to customers but calculate VAT payments, cash flow and expenses. Many accountants can log into your account directly to help remove the stress of having to send over all your paperwork.
- If you’re a sole trader it is vital that you look at having a business bank account separate from your personal income bank account. This will make managing financial records a lot easier for you when it comes to undertaking your self-assessment.
- Self-employed individuals are expected to keep records such as invoices, mileage books, receipts, bank statements, cash books, personal income put into the business, money taken out of the business for personal use, dividend certificates & meeting notes