Closing the gap

As we get closer to the deadline for filing and paying your personal taxes, it might be a good time to discuss something that may go into a tax return. Now I could write a book on everything that goes I to a personal tax return, but that's not my purpose here, I aim to simplify and make the information deliverable to the average person.

Self employed income.
The average person is more likely to have employment or self employed income and as those who work purely under PAYE don't have to do a tax return, let's do self employed income.

First you have to determine whether or not it is a trade. Sometimes it's really obvious, sometimes you start something as a hobby and it grows, you make money from it and at some point it crosses a line and you have to include it in a tax return and pay tax (maybe) To determine this HMRC have badges of trade, the more you have the more likely you are trading instead of hobbying. This includes a profit seeking motive, regularity of transaction etc.

So then you determine you are trading and need to report this to HMRC. Next you need all those piece of paper and have an invoice party. Basically you have keep your records for 6 years plus the current one. You can list your sales and purchases in a spreadsheet, a software or just keep everything in a shoe box, but of course the more work you do the less your accountant (or you at the end of the year) hopefully has to do and the cheaper it is to get your tax return done 👍.

How do you get to a profit figure. Simple, read this post. Income should be included as you earn it, so usually when it's invoiced. As a self employed person you can claim for any cost that is wholly and exclusively for the business. This includes:
Materials
Travel (if using own car can claim 45p per mile for qualifying travel)
Professional fees
Rent (if you work from home or use it as storage then you can claim use of home)
Wages/subcontractors
Stationery

You get the idea. If your costs come to less than £1,000 (side eyes my business), then you can claim that as against your sales instead.of your costs. This is aimed at those who have side hustles or have literally just turned a hobby into a job. HMRC don't want these small earners caught out because of ignorance (even though it's not an excuse), these are not the fish they want to fry.

After all this work you get your tax bill. Unfortunately for most self employed individuals they have the lovely added bonus of paying payments on account. I have had so many questions and even some clients get really upset about these as they didn't know. It's a payment in advance of the next tax year, estimated on the tax year you've just filed. So say it's your first year your filing now (2019/20) and your tax liability is £2,000. On 31st Jan 2021 you will have to pay the £2,000 due, but also make a payment of £1,000 for the tax year 2020/21 and then another £1,000 July 2021. The next year your liability is £2,200, you only owe £200, but you also need to add the £1,100 payment on account due making it £1,300 due.

I think the name of this is misleading, it is technically a payment on account in terms of when the tax is normally due (31st Jan), but actually you're paying the tax closer to the date of when you earned the profits whereas those under PAYE, pay tax as they earn the income. This may change however with the push to "Making Tax Digital", it is expected we'll be making quarterly personal tax returns in the not too distant future. Who really knows.