Self-employment tax is a big area and obviously we can’t cover everything here, but the important things to remember are: firstly, it’s easy to do by yourself and not nearly as complicated as some people make it sound, and secondly, if it really does feel complicated, don’t suffer – get an accountant. Many accountants specialise in helping self-employed people, so even if you’re making peanuts it’s usually worth spending a few hundred quid on hiring a nice, soothing accountant who will help you through the whole tax process.
What is self-employment?
Self-employment is working for yourself, and it covers anything that makes you money as an individual: selling artworks, freelance teaching or design work, and so on. Unlike employees, who get a certain amount of money skimmed off their paycheck every month for tax and National Insurance (NI) contributions, self-employed people have to deal with their own taxes and NI. This can sound scary but is actually pretty straightforward.
How do I get started?
You need to register as self-employed with HMRC (the UK tax department). You can do this online. HMRC will tell you how to make NI contributions and give you a Unique Taxpayer Reference (UTR), a 10-digit number that you’ll need to file your tax return.
What is National Insurance?
National Insurance (NI) payments are fairly small monthly or twice-yearly contributions that entitle you to state benefits, such as a pension. There are lots of different classes of NI – self-employed people currently pay Class 2 contributions, but you might also pay Class 4 if you’re making a lot of money, or Class 3 if you want to put extra money into your pension and so on. Read all about it on the HMRC website. Once you’ve figured out how much NI you have to pay, the easiest way to pay it is to set up a direct debit.
What if I do lots of different kinds of work?
If you combine self-employment with other kinds of work (for example running a company or having a job where you’re taxed at source), you’ll still need to do a tax return and pay taxes on the money you make from working for yourself. For any advice about specific situations, such as working as an overseas student, contact HM Revenue and Customs (HMRC) directly or talk to a professional accountant.
How do I work out my tax?
It’s important to keep track of your expenses and hold onto receipts and so on, because you’ll be taxed only on your profits. Any money you spend on your business, for example buying new software or materials, can be deducted from your taxable profits. (If you’re not sure if something is a proper business expense or not, check the links below or with an accountant.)
Say you worked on five or six projects in one year, and your income was £20,000 – but you spent a total of £5,000 on renting studio space, buying materials and so on. You would only calculate your tax on the remaining £15,000 of your profit.
You’re also only taxed above a certain amount of money. For the tax year 2011/12, you only have to pay taxes on profits above £7,475, but this changes from year to year, so as with everything, don’t take our word for it: check.
HMRC’s online system automatically calculates how much you owe once you’ve put in all the information, or you can hire an accountant, or if you’re good with numbers you can do it yourself.
Time invested in getting a decent system set up for your taxes – small things like where you keep receipts and so on – will be repaid in less stress when you get around to filling out the tax return.
How do I file my tax return?
Tax returns can be filed either by post or online. If you’re doing your tax return online, make sure you register in time to avoid last-minute panic: it can take a few weeks to get your login details. Unless you’re deeply committed to filling out paper forms, the online tax return is a great option, because it’s really easy and saves trees (but mostly because it’s really easy).
When do I have to do this?
The tax year runs from 6 April to 5 April the following year. Paper tax returns are due on 31 October, and online tax returns and payment are due by 31 January. For example, in January 2012, self-employed people who choose to file online will be sending in tax returns for the tax year ending 5 April 2011. You get fined if your tax return is late. If you do it early: well done you! Your fellow self-employed friends may resent you for it, though.
Where can I get help?
HMRC will be happy to help with any reasonable questions: the important thing is to stay in touch with them, even if you’re having problems. Many people have commented on how surprisingly nice and reassuring they are on the phone – try calling them and see for yourself.
If you don’t want to deal with all of this on your own, it’s a good idea to get an accountant. There are plenty of accountants who specialise in dealing with self-employed people working in the arts, and often they can save you more money than they cost you.
I’ve got a really specific tax question – what should I do?
As mentioned, for any detailed advice on specific situations – for example if you’re not sure of your employment status, or you’ve been working abroad, etc – it’s always best to contact the tax office or talk to a professional accountant.