Business owners, it’s that time of year again.
For the self-employed, freelancers or those with a secondary source of income, there are two words that trigger a sense of dread every single year.
Simply put, it’s a calculation of all the tax you must pay for any given year, based on your income. But among some workers now long in the tooth, it has evolved into a term that is synonymous with late nights, stress and endless sifting through a year’s worth of expenses. If you’re new to the process, these stories can often put you off before you’ve even started.
Because, well, let’s face it: you didn’t get into self-employment, sole trading or supplementary shifts because you love paperwork (you might, of course, but that’s incidental!). It’s more likely that you chose this form of work for its freedom and flexibility, to pursue a passion or to earn a bit of extra cash on the side.
You’re not alone, either. According to the Cabinet Office, there are around 2 million people who fall under this bracket in the UK today – a figure that has increased more than 14% in the last decade. That’s hundreds of thousands of people, each embarking on the same journey as you are now.
The difference? You’ve got a handy guide to help you hit the ground running, leaving you with more free time to concentrate on the important stuff.
Here’s how it all works.
First things first
Assuming you’re sure that you fall under the bracket of those who need to file a Self Assessment (a full list is provided by the government here), then the first step is a simple one.
Register with HMRC.
It’s easy; all you need is your National Insurance (NI) number, and your personal and business details.
You can do it in (almost) any way you like – either online, by post or by phone. No carrier pigeons, messages in bottles or teleportation of documents are accepted by HMRC at this time.
Once this is done, you will receive a Unique Taxpayer Reference (UTR) number in the post. Keep this safe, as you’ll need it every time you want to access your account. You’ll then receive a PIN in the post. After that, you’re good to go.
Now, we move onto the main event…
Step 1: Collate your records
No, we aren’t talking about your vinyl collection. The real meat of the Self Assessment process involves your records – essentially a piece-by-piece picture of your financial year.
This includes any and all of the following:
- Income — from your self-employed gig, and your main job if you have one.
- Business expenses — items you can claim back tax on. More on that here.
- Dividends — if you’re a limited company, this is what you may have paid to yourself (and other directors) on top of your salary.
- Pension income — if you’re contributing to a pension plan, it’s best to keep track of this.
- Redundancy — if you received a payout following the finishing of a previous role, this should be included too.
- Gifts or benefits — referred to by HMRC as the much-less-glamorous P11D, these are things you receive on top of your salary, such as company cars or interest-free loans for travel or supplies.
- Additional income — if you own property, have worked abroad, or gained interest on existing assets.
Seems like a lot to keep track of, right? Well, yes and no. If you’re working your way backwards, trying to track down every expenditure and income, then yes – this is where the horror stories come from.
But it doesn’t have to be like that.
Now, there are plenty of tools at your disposal – like Dext Prepare! – to turn this process from a battle to a breeze.
Using our cutting-edge scanning technology and instant document capture, your records – whether paper, email or otherwise – can be digitised instantaneously and stored in a secure, searchable log for all eternity. We pull all the key information so you don’t have to.
That means no more sprawling spreadsheets, no more shoeboxes full of receipts, and no more chasing from your financial advisors for paperwork (saving you both time in the process!). Your account is available on-the-go, anywhere, as long as you have wi-fi.
Step 2: Putting your tax money aside
Now your records are all in order, it’s time to work out how much tax you’ll need to pay.
Of course, HMRC will sort this out for you once they have processed your return, but you don’t want to get caught out. As a general rule, set aside 30% of your earnings to ensure you’ve got enough to pay your bill, or more if your earnings place you in a higher tax band.
Or, if you want to work out your exact total, you can do that too.
Step 3: Save the date!
If there’s one you remember this year, make it that one. File it next to your anniversary, your Mum’s birthday or your child’s first day back at school.
Why? Because if your return is late, you’ll be charged with an immediate £100 penalty. You’ll then have a further three months to complete it, after which time you will start being charged £10 each day for up to 90 days before it escalates further.