Six simple steps for self-assessing freelancers
If you’re new to the world of freelance consulting and have just set up your own limited company, you may be wondering if you have to file a Self-Assessment tax return by the end of January 2017, writes Emily Coltman FCA, chief accountant at cloud accountancy firm FreeAgent.
But if you do, what should your tax return contain? And how do you go about completing what will likely be your first ever tax return in a way that won’t incur HMRC’s wrath? Well fear not, because there’s just six steps you need to take.
Step 1: Work out if you need to file a return
HMRC says that company directors do normally need to file a tax return, and if HMRC sends you a ‘Notice to Complete a Tax Return’ then you must comply, otherwise you will be fined.
If you set up a limited company after April 6th 2016, then unless you need to file a tax return for another reason (for example, if you rent out a property), then you have an extra year to spare -- your first tax return will be due by January 31st 2018, not 2017.
Step 2: Leave enough time to code and register
If you’ve never filed a tax return before, and haven’t yet registered with HMRC to file a tax return as a company director, you’ll need to do so and, as this process requires HMRC to send you an activation code in the post, I would recommend registering as soon as possible to avoid the code being delayed -- or lost in the Christmas post! You can fill in the form to register with HMRC here.
But if you already file tax returns for another reason, you don’t need to re-register with HMRC; just add your salary, benefits and dividends to your tax return as per the next section.
Step 3: Inputting what where
Remember this is your tax return we’re talking about (not the company’s), so make sure you put in your own income -- your company’s profits will be reported on its own tax return.
What you’ll need to put in, would be:
- Your salary that the company paid you for the tax year April 6th 2015 - 5th April 2016, and any tax they took off -- from your form P60
- Any taxable benefits (such as a company car) and reimbursed expenses the company gave you, again for the tax year 2015/16 -- these will be on your form P11D
- Any dividends the company declared to you for the tax year 2015-16
The dividends go on the ‘Main Return’ pages of your tax return, because that’s income that relates to your ownership of shares in the company. Your salary, expenses and benefits go on a set of ‘Employment’ pages, because that relates to the work you did for the company.
You’d also need to put in any other taxable income you receive, for example, rent of a property or interest on a bank account (but leave out interest on an ISA since that’s tax-free).
Step 4: Get your timings on a calendar
Your tax return will need to be filed online to HMRC by January 31st 2017. If you file after this date, even by as little as a day, then you’ll be fined £100, and HMRC’s fines increase if your return is more than three months late.
These fines apply even if you don’t have any extra tax to pay or if you have paid all your tax.
You can file your tax return via HMRC’s online portal, but you may also be able to file directly to HMRC through external software.
Step 5: Check if you owe extra
You may have some additional tax to pay if you’ve taken a lot of dividends from the company, or if you have other income such as the sale proceeds of a large capital item.
If you do have tax to pay, filing your tax return and making the payment are two separate processes, so make sure you make the payment before January 31st 2017 to avoid being charged interest.
Step 6: Consider an expert if you’re unsure
If you’re not 100% confident about your tax calculations -- or how you’ve been managing your financial data through the year --- it’s a good idea to consider enlisting the help of a professional accountant to help you with your tax return. Many firms have expertise in working with contractors and will be able to guide you through specific queries or concerns you have.
You may also want to look at whether an accountant could help you stay on top of your finances throughout the whole year, rather than just at tax return time. Accountants specialising in freelance contractors typically offer fixed fee packages for the year that include advice and guidance in contractor-specific tax issues such as IR35, and often include a dedicated accounting/bookkeeping solution for you to work together on your financial data.
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