Tax tips to help the self-employed
The Low Incomes Tax Reform Group (LITRG) has published a guide to help the self-employed understand the tax system better. Although aimed at those on lower income, the guide will also be useful to the self-employed generally.
The guide is a response to LITRG’s concerns that low income self-employed people do not understand fully their tax position and the interaction with some benefits, and to worries about the impact of reduced guidance and face to face help for taxpayers from HMRC.
The last ten years have seen a large rise in the number of people who are self-employed,many of whom earn a low income, perhaps work in the ‘gig economy’ and are unable to afford paid tax advice. LITRG’s guide supplements the group's existing website material by explaining some of the less common tax rules affecting the self-employed. It discusses areas such as how to prepare accounts and a Self Assessment tax return, tax allowances, partnerships, taking on staff and registering for VAT, and the tax responsibilities when a business ceases to trade.
The LITRG guide is split into two parts:
- the first considers the main areas that concern most self-employed people with straightforward tax affairs and also covers in greater detail more complex areas which may arise, for example, those claiming certain state benefits or who have additional tax obligations such as registering for the Construction Industry Scheme (CIS);
- section two includes general useful information such as advice on contacting HMRC, important tax deadlines and checklists. It also contains a case study showing how a newly self-employed taxpayer would prepare their accounts and Self Assessment tax return.
LITRG’s five tax tips for low income self-employed
- 'We strongly recommend that you understand your employment or self employment status before you start work because if you are self-employed you will have no entitlement to any employment rights, which include rights like paid holidays and sick leave; and you will have to take full responsibility for your tax affairs.
- It is very important that you keep personal transactions (such as drawings) separate from your business transactions – although this does not necessarily mean that you need to have a separate business bank account (depending on your bank’s terms and conditions).
- If you want to keep things simple use an accounting date of either 31 March (if you prefer to work in whole months) or 5 April so it matches the tax year.
- It can be quite a shock to your cash flow when you first move to payments on account. It may help you to put a certain amount each time you are paid into a different bank account. Remember you will need to save an additional amount for the first time you move into the payments on account system as you will be starting to pay your tax earlier.
- Do not forget to notify HMRC (for tax credits), DWP (for universal credit and other means-tested benefits) or your local authority (for housing benefit and council tax reduction schemes) if you have stopped being self-employed.'
The LITRG website contains a good deal of useful information which, although principally aimed at those on low income, is often relevant to a far wider range of people and is presented in a very readable format.