All on you: Preparing for your first self-employed tax year
If you’ve ever breached the topic of starting your own business, it would be fair to say that your head is clouded with umpteen issues. How are you going to attract new customers? How will you beat the dreaded statistics and survive in your first year? The list could go on.
One question that might not top the tree, but is unquestionably important, focuses on tax. In short, how are you going to prepare for that first year of tax obligations?
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While you may have once had a trusted employer to do all the calculations, this now rests on you. Let’s take a look at some key tips you should tap into ahead of that important first year.
The importance of keeping records
If you only take one message from today, ensure it focuses on keeping records.
One of the most frustrating and time-consuming parts of completing your tax obligations is when you don’t quite know what you’ve spent or even your income.
This is where keeping records in real-time is crucial. There are all sorts of accounting apps that can assist with this, but even if you don’t consider yourself a techno-whizz, basic pen and paper can also suffice!
Understand what a true expense is
Of course, it’s not just a case of making sure you keep records of everything. You also need to know what can and can’t be classed as a business expense.
HMRC provides a full and comprehensive list here, but some of the key things to take note of include:
- Business premises costs
- Cost of goods
- Transportation and travel
- Marketing and advertising
- Staff costs
- Insurance (anything ranging from professional indemnity to contents insurance is usually covered, with one of the few exceptions being life insurance policies for obvious reasons)
As you may have gathered, the above is very much a high-level list. Ultimately, there will be exceptions in each category. This is where it now sits as one of your essential obligations to ensure you are legally allowed to claim specific expenses. This brings us to our next point…
If in doubt, get an accountant
Yes, it’s an expense. But if you are genuinely unsure about what you can or can’t claim, paying an accountant to guide you could potentially save you a lot more money in the long term.
Let’s not forget that your tax affairs are just the tip of the iceberg when it comes to your first year as a self-employed professional, and your time will be at a premium. While paying for an accountant might feel like an unnecessary expense right now, when it comes to the crunch, it can be well and truly worthwhile.
Know your deadlines
If there’s one thing that can trip up any professional, it’s failing to meet a deadline. This is especially true when it comes to tax, which is why it pays to be aware of the key dates in the diary.
For example, did you know that as a self-employed individual, you must file your first tax return by the 31st of October following the end of the tax year in which you became self-employed?
Meanwhile, any payment you owe needs to be with HMRC by the 31st of January.
Of course, these dates will differ depending on whether you are completing a paper or an online return, but the key message here is to ensure you are across the deadlines.
Put money aside
Last but not least, you should put money aside from every invoice you receive to ensure you have the funds available come tax time.
Self-employed professionals often fall into the trap of spending everything they earn and then being forced to find the cash when tax bills come calling. This can often prove difficult, especially when you are just starting, which is why it pays to put money aside on a regular basis.
How much you need to put aside will depend on several factors, including how much you earn and what expenses you are claiming, but as a rule of thumb, most experts recommend setting aside at least 25% of each invoice you receive.