Tax and self employment
You may be allowed to wear pyjamas at your desk, but that won't fool the taxman. Here's a starter guide to managing your moolah.
What are my responsibilities?
Unlike the nine-to-fivers, any money you earn as a self-employed person (or freelancer) will not have any deductions taken from it. So don't be tempted to blow what looks like an inflated pay cheque because you are still liable for tax and national insurance contributions, possibly also business rates (and a pension, should you choose to invest for the future).
Every year you need to fill out a Self Assessment form and return it to HM Revenue & Customs (HMRC). If you are completing the form online, the deadline is 31 January following the tax year, but if you want to complete a paper copy you need to get it in by 31 October.
If you've got this far and you're freaking out, consider hiring a tax accountant. Not only can they help to manage your financial affairs, they could also keep your tax liability to a minimum (for a fee, but it's tax deductible if it is for dealing with your self-employment).
So I still have to pay tax?
If you've quit your real job for a life of leisure self employment, you need to inform your local tax office. Once you've registered, which you must do right away if you are going to avoid a penalty, they will normally send you a tax return every year (in which you detail your income and expenditure). Effectively, this means you won't be asked to pay tax for 12 months, but that demand will arrive one day so be sure you have the money available.
How much tax will I owe?
You will pay the same rate of income tax as someone who is employed. You'll also have to make National Insurance contributions, but these will be classed differently to an employed person.
Can I bring down my bill?
The good news is that you are entitled to deduct certain expenditure from your income - basically the stuff that relates to your business. For example, a self-employed film critic might claim for cinema tickets and movie review magazines, plus computer and printing costs, not to mention the cost of heating and lighting the office.
You need receipts for all these things, of course, so start collecting/itemising everything you spend. What you can claim often comes down to common sense (new undies would be pushing it), while some items may only be allowable as a percentage (i.e. 10% of your electricity bill if your 'office' is a room in your flat). Once again, this is where an tax advisor can come in handy.
Do I have to charge VAT (Value Added Tax)?
If you're earning £67,000 or more before expenses, you are legally required to become VAT registered and charge VAT on anything you earn. You can also choose to register VAT even if you're not earning more than the threshold, but this is subject to certain conditions. To find out more read TheSite.org's factsheet on VAT.
Do I have to pay business rates?
This can apply to anyone who uses a property for business purposes. Much depends on the kind of work you do, and can affect your insurance, too. For example, jotting notes at the kitchen table isn't likely to cost you a penny, but if you're renting a premises, or your entire home has been transformed into a tie-dye factory, then be prepared to pay.
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