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Comprehensive Tips to Tax Returns for Self-Employed Individuals in 2023

Tax Returns for Self-Employed

A Comprehensive Guide to Tax Returns for Self-Employed Individuals

Being your boss and running a successful business is a dream come true for many. Whether you’re a freelance writer, a skilled tradesperson, or a budding entrepreneur, self-employment offers opportunities and rewards. However, it also comes with certain responsibilities, including managing your taxes effectively.

With various rules, deadlines, and considerations, it’s essential to have a clear understanding of tax returns for self-employed. Not everyone understands why and when you need to file a self-assessment tax return, including the criteria set by HMRC.

Today we will give a guideline on tax returns for self-employed individuals so you can enjoy hassle-free tax return preparation.

Tax Returns for Self-Employed Individuals: Who Are Eligible?

If you are self employed and earned more than £1,000 in the last tax year or were a partner in a business partnership, you must fill in a Self Assessment tax return. Being self-employed means you run your own business and are responsible for its success or failure.

You may need to submit a tax return if you have untaxed income ‘Untaxed income” means any income excluded from federal tax under the IRS code.

This includes:

  • income from renting out a property,
  • receiving tips and commission (such as when running a window cleaning business and customers give you extra money for a job well done), 
  • earning money from savings,
  • investments, or dividends, 
  • or having income from abroad.

To determine whether you need to file a Self Assessment tax return, HMRC provides a tool that you can use to check your specific situation.

What Is The Self-Employment Tax Period?

The self-employment tax period refers to calculating your taxes as a self-employed individual. While HMRC sets deadlines for submitting your tax return and paying the taxes you owe, you can choose the dates that your tax is calculated. This period is your “accounting period” and typically covers 12 months.

If you prepare your accounts and financial records until 31 March, HMRC treats them as if they cover the entire tax year, ending on 5 April. In other words, it’s like your accounts are automatically extended to the end of the tax year.

By aligning your accounting period with the tax year, you can start fresh with new accounts at the beginning of the new tax year. The advantage is that you’ll have the longest possible time to pay the taxes you owe, as the deadline will be 31 January of the following calendar year.

However, this time of year may not be suitable for everyone. If, for example, it’s your busiest period of work, it might be better to choose a different accounting year-end that aligns with a quieter period in your business. This way, you’ll have the time to finalize your year-end accounts without being overwhelmed.

Your “basis period” is when HMRC assesses your tax. In most cases, it will be the same as your accounting period, especially if your accounting year-end aligns with the tax year-end.

Tax Return for Self Employed in UK: 9 Steps to Follow

By fulfilling your tax filing obligations as a self-employed individual, you ensure compliance with the law and protect yourself from penalties.

To file your self-employment tax return in the UK, follow these steps:

Register As Self-Employed: 

If you haven’t already done so, you must register as self-employed with HM Revenue and Customs (HMRC). You can register online through the HMRC website or by calling the HMRC self-employed helpline.

Gather Your Records: 

Collect all the necessary records and documents related to your self-employment income and expenses. This includes invoices, receipts, bank statements, and other relevant financial documents. You’re likely to need details of:

  • employment income (if you’re also employed)
  • dividends
  • partnership income
  • interest
  • rental income
  • foreign income
  • pensions contributions
  • Gift Aid
  • pension income
  • payment on account
  • redundancy lump payment or unemployment benefit
  • P11D
  • capital gains

Determine Your Accounting Period: 

Your accounting period is the period for which you’ll report your self-employment income and expenses. It will most likely be from 6th April to 5th April of the following year, aligning with the UK tax year.

Calculate Your Self-Employment Income:

Calculate your total self-employment income for the accounting period. This includes all the money you earn from your self-employment activities.

Calculate Your Allowable Expenses: 

Deduct your allowable expenses from your self-employment income. Allowable expenses are the costs incurred in running your business that are eligible for tax relief. Examples include office supplies, equipment, travel expenses, and professional fees.

Complete The Self-Assessment Tax return: 

Use the HMRC Self-Assessment online service or software approved by HMRC to complete your tax return. You have to provide accurate and detailed information about your self-employment income, expenses, and any other relevant sources of income or relief.

Declare Your Profits And Pay Class 2 And Class 4 National Insurance:

Alongside your self-employment income tax, you must pay Class 2 National Insurance contributions (NICs) and Class 4 NICs on your profits. These contributions help fund your state benefits.

Submit Your Tax Return: 

Once you have filled in all the necessary sections of your Self-Assessment tax return, review the information to ensure accuracy and completeness. Then, submit your tax return for self-employed electronically through the HMRC online service or send a paper copy by mail.

Pay Your Tax Liability: 

After submitting your tax return, you will receive a calculation of the tax you owe. Pay the tax liability by the deadline specified by HMRC, usually by January 31st, following the end of the tax year.

Keep Records And Receipts: 

Retaining records and receipts relating to self-employment for at least five years is vital in case of future audits or inquiries by HMRC.

Importance of Filing Tax Returns for Self Employed

As a self-employed individual, filing tax returns is paramount for several reasons. Here are the key points to consider:

Meeting Your Tax Obligations: 

As a self-employed person, it’s essential to understand and fulfil your tax obligations. By filing your tax returns, you ensure that you comply with the tax laws and regulations applicable to your situation. 

This involves:

  • reporting your income, 
  • calculating and paying the correct amount of taxes,
  • and fulfilling any specific requirements related to your industry or profession.

Avoiding Penalties And Legal Issues:

Failing to file tax returns for self-employed can lead to penalties, fines, and legal consequences. Tax authorities expect all individuals, including self-employed individuals, to report their income and pay appropriate taxes accurately.

By fulfilling your tax filing obligations, you reduce the risk of facing penalties, interest charges, audits, or even legal action,

Claiming Deductions And Benefits: 

Tax return for self-employed allows you to take advantage of deductions and benefits available. Unlike employees, you can often deduct business expenses from your taxable income, which helps lower your overall tax liability.

You can accurately claim these deductions and maximize your tax benefits by keeping proper records of your business transactions.

Establishing Financial Records:

Filing tax returns for self-employed helps you establish accurate financial records for your business. It provides a clear record of your income, expenses, and profits, which can be valuable for purposes such as;

  • obtaining loans, 
  • applying for credit,
  • or demonstrating the financial health of your business to potential investors or partners

 

FAQ on about Tax Returns for Self-Employed

How to calculate tax return for self-employed UK?

When you’re self-employed, you pay income tax on your trading profits – not your total income. To work out your trading profits, simply deduct your allowable business expenses from your total income.

How much tax do I pay on self-employed income UK?

UK income tax rates and bands for 2023/24 are:

20% tax on earnings between £12,571 and £50,270. 40% tax on earnings between £50,271 and £124,140. 45% on earning over £125,141.

Do self-employed pay tax in UK?

If you are self-employed you usually pay income tax through the Self Assessment tax return system.

How can self-employed reduce taxable income UK?

Self-employed? Tips to help cut your tax bill

  • Claim for higher rates of pension tax relief.
  • Claim all your allowable expenses and any extras.
  • Make a charity donation now to reduce your tax.
  • Correct and claim against previous tax years.

How much is 105k salary UK?
On a £105,000 salary, your take home pay will be £67,438 after tax and National Insurance. This equates to £5,620 per month and £1,297 per week.

Conclusion

We hope our discussion has provided you with valuable insights and practical tips on tax returns for self-employed. Remember, staying on top of your tax responsibilities is essential for maintaining compliance and optimising your financial position.

While managing your tax returns alone can be a possible option for some, it’s essential to recognize that the process can be complex and time-consuming. That’s where ABM Chartered Certified Accountants can make a significant difference. 

Our tax advisers will work closely with you to gather financial information and prepare tax return files accurately to ensure your tax returns are filed on time. Seeking professional support saves you time and effort and offers peace of mind knowing that your tax affairs are in capable hands.

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