Articles - 14th January 2021

A checklist for the January 31st tax deadline

Words by Albert Azis-Clauson
Illustration by James Merritt

It’s boring, but if you’ve saved money specifically for this purpose, it shouldn’t be painful. Here’s what you must do to get through your self-assessment if it’s your first time doing it (if it isn’t, read through anyway to make sure that you’re headed in the right direction).

 

1. Assess which kind of freelancer you are.

When it comes to taxes, there are two choices. You’re either a sole trader, which the majority of freelancers are, or you’re a limited company. We’re going to focus on sole traders, as the majority of you are probably not limited companies. If you are a limited company, please follow the advice given here

2. Fill out a self-assessment form. 

If you haven’t already, once you start making more than £1,000 a year from your freelance work, you must fill one out  by registering for self-assessment on the HMRC website. Do not delay, as there are penalties to pay if you are late. The deadline was October 5 after the end of the tax year during which you went freelance. Once you start making more than £12,500 in profit (figure that out here), you will start to be taxed at a rate of 20% until you hit the next tax bracket at £50,000, which becomes 40% for everything over £50,000. This becomes more complicated if you’re simultaneously employed and self-employed, which many freelancers will be in order to supplement their income. We’ll cover that in more detail below.

A letter should arrive within ten days containing your 10-digit unique taxpayer reference (UTR) number. You must hold onto this. HMRC will then set up your online self-assessment account, and then you just need to file your tax return by January 31st, 2020.

When you sign up to self-assessment, you will automatically be added to “payments on account”, which means the bill will be split between two dates in order to make life easier for you. Those bills must be paid on July 31st and January 31st, the upcoming pay deadline. Read more here, but don’t be shocked at the extra charge if this is your first time. They will charge 50% of the estimated current bill as well as the previous year’s bill, so be ready to pay that.  If you are already signed up and delayed payment on the July 31st second payment for 2020 due to Covid-19, you will have to pay that now. Do what you can to be ready. 

4. Have a think about VAT, but not too much of a think. It’s not really worth worrying about VAT unless you’re making more than £85k a year. It’s not a quick process, and your time is worth more spent on doing actual work. If you work with lots of larger companies, they may ask you to do it, but it is very much up to your own discretion. 

5. Don’t forget about National Insurance. Get more details on the HMRC website on what NI is or how much you owe, as this will very much vary from case to case. The main takeaway is that if you have the right to work in the U.K., you must apply for one and pay either class 2 or class 4 contributions depending on your income. Make sure you give yourself eight weeks to apply. 

6. Keep track of and then tally your expenses. What are expenses? At their core, they’re anything you use to run your business, and they are usually deductible. What counts as an expense as a freelancer? Here’s a list;

    1. Travel to and from work (fuel included)
    2. Office supplies
    3. Staff salaries (including outsourcing)
    4. Marketing costs
    5. Websites
    6. Training courses and books
    7. Insurance
    8. Work related equipment (laptops included)

All of these can be deducted from your overall payments. For more details, read here.

7. Make sure you understand the band system if you are employed as well as freelance. If you live in different sections of the U.K., that will mean different things as Scotland has two extra bands. But let’s use an example to break down what that means for England. 

Let’s say Steve is an English freelance senior copywriter who earns £40,000 a year for his work. Wow, go Steve! 

He has work expenses of £2,000, so his total profit is £38,000. If that was it, he would set aside money throughout the year based off of that income to be taxed at 20% after his income allowance of £12,500, which would not be taxed. 

So, Steve makes £38k profit, and is taxed 20% of £25,500, which is his profit minus income allowance of £12,500

Clear? Beautiful.

But, Steve has an expensive hobby of collecting newts (his mates even call him King Newt and he got married in the London Zoo’s reptile house. You do you, Steve). 

So, in order to supplement his amphibian-based hobby, he works part-time at a pharmaceutical copywriting company, where he brings in an extra £15,000 a year, bringing his net income to £53,000 a year. 

 

This means, Steve pays: 

      1. 0% tax on the first £12,500
      2. 20% tax on his next £34,500 (the majority of which is freelance work)
      3. And 40% tax on his final £3,000, as it is above the £50,000 band mark. 

He does not pay 40% on his entire income, even though he is above the £50,000 band in England. This is a common misunderstanding, so be sure that you do not fall into it. The £15,000 he receives from his employees is taxed according to PAYE, which will be clear from day one depending on whether you are hired as a contractor or as an employee. Make sure you speak to the person who hires you, and potentially their accountant team too, to clearly establish which you are. 

And now it’s time to actually fill the thing out and pay it!

If you were hoping to do it by post for this year, sorry, but the deadline is already well past (it’s on October 31st, spooky). The deadline for paying online is January 31st. Get moving!

If this is your first time filling out a tax return, don’t worry too much about the calculations; HMRC will do the maths for you, and if you overpay, you will be sent a refund. Be sure you do not underpay, however, as you will be charged interest on the remaining sum. 

Here’s a final example of how the math works for paying your tax bill; 

Let’s say your tax for your first year as a freelancer, 2019-20, was £3,000, and you made two payments on the account last year of £900 each, covering £1,800 of expenses. 

The total tax to pay by midnight on 31 January 2021 is £2,700. This sounds like a lot, but it is because for first time payers, this includes: 

  1. Your ‘balancing payment’ of £1,200 for the 2019 to 2020 tax year (£3,000 minus £1,800)
  2. The first payment on account of £1,500 (half your 2018 to 2019 tax bill) towards your 2019 to 2020 tax bill

You then make a second payment on account of £1,500 on 31 July 2020, and that is your tax paid for the year. You can do that through direct debit on the gov.uk site, here, and can figure out what you owe based on your income here

Be aware, HMRC have announced that they are happy to waive fines for those affected by Covid. However, if you have the ability to, get this out of the way now. It can be tempting to kick the can down the road, but unless you have a legitimate reason, there’s no reason to not get this done now.

 

Whew, that was a lot, right? If you’re looking for some help setting this up, do not hesitate to make an account with Finmo, our recommended tax tool designed purely to help freelancers, the self-employed, and anyone who needs to fill a self-assessment form. You can get started for free, or you can pay a one-time fee of £119 for them to guide you through the whole process. Check out their extremely helpful guides for more information. 

 

What are your goals for 2021? To grow your business, or to just find your first client? No matter what stage you’re on in your freelance journey,  Albert’s webinar and UnderPinned’s Ultimate Guide to Freelancing Course will make sure you’re on track to build a successful freelance career. The course starts February 1st and will consist of five jam packed weeks of learning. Find out more about the course and sign up here. If you want to get an idea of what’s on offer before signing up, sign up to one of our free webinars here.

We champion the freelancers and every entrepreneur who took a leap of faith with their idea.

If this sounds like you, head over to our Virtual Office and send us your best work via an UnderPinned Portfolio. We want to hear from you!

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