The UK has recently seen a significant increase in self-employment, which means more people are going through the self-assessment tax return process.
This might seem like a daunting prospect if you are facing it for the first time, but it is perfectly possible to file your return without any stress or difficulty, as long as you allow enough time to complete the necessary steps.
Read on to find out more about self-assessment and how to make sure your tax arrangements are as efficient as possible.
How self-assessment works
Whereas ordinary employees make their tax payments through the pay-as-you-earn system, self-employed workers have to declare their own income, expenses and profit by submitting self-assessment forms.
You are required to submit a tax return if you are a self-employed sole trader, a partner in a business partnership or a company director.
People in these categories need to register for self-assessment. Those filing returns for the 2013-14 tax year should have registered by October 5th 2014, while those who registered in the past are likely to have received a letter from HM Revenue & Customs (HMRC) in April or May reminding them to submit their return.
Self-employed workers can file returns using HMRC's SA103S or SA103F paper form or do it online, with the latter option offering a later deadline.
Deadlines and penalties
The deadline for filing paper self-assessment returns for the tax year ending April 5th 2014 was October 31st, but if you haven't yet submitted your records, don't panic - you have until midnight on January 31st 2015 to do it online.
If you are using the online system for the first time, get the process underway immediately so you can register and get your login information as soon as possible.
It is important to stick to the deadline for submitting your return, as failure to do so will incur penalties. You will be charged £100 if your tax information is up to three months late and after this time the penalty rises to £10 a day for a maximum of 90 days.
Tax returns that are six months late will lead to fines of five per cent of the tax due or £300, whichever is greater, and the same amounts will be payable again after 12 months.
Income tax and national insurance for the self-employed
If you qualify as self-employed, you are required to pay income tax on your profits, not your gross income.
Your taxable income is calculated by deducting business expenses and any losses carried over from previous years from your business income. You can also claim tax relief on items required to carry out your work, as discussed in the next section of this article.
Self-employed workers also have to make national insurance contributions to ensure they will be entitled to a state pension and other benefits.
You pay national insurance if your annual profits exceed £5,885 and the levels of taxation are divided into two categories. Class two national insurance is £2.75 a week and applies to anyone making a profit of more than £5,885.
If your profits range from £7,956 to £41,865 you will pay nine per cent of the exact sum in national insurance, and a further two per cent of any takings over £41,865.
Expenses and capital allowances
It is important to make sure your tax arrangements are as efficient as possible by deducting expenses from your income to calculate your taxable profit.
To give a simple example, if you have a turnover of £40,000 and £10,000 in allowable expenses, you will only pay tax on the remaining £30,000.
Tax-deductible costs could include office stationery, energy and utility bills, staffing expenses, uniforms, travel fares and things you buy to sell on, such as stock and raw materials.
Financial commitments like insurance and bank fees could also be subtracted from your turnover for tax purposes, along with the costs you incur when advertising or marketing your business.
If you are classed as self-employed, you should also be making the most of capital allowances providing tax relief on your capital assets: items such as computers, machinery and tools required to run your business.
The total amount you can claim is known as your annual investment allowance. Recent changes introduced by the government raised the upper limit of this allowance from £250,000 to £500,000, an increase that will remain in effect until December 31st 2015.
To maximise the financial efficiency of your business and protect yourself from penalties and other financial shocks, it is important to plan ahead, do your research and be aware of every benefit and support scheme available to you.
In a competitive marketplace, ensuring that you are not paying any more tax than necessary could be the difference between success and failure.
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