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Like a boss: Self-assessment tax hacks for the self-employed and contractors

By Mike Narouei, Content Producer at Boring Money

23 Jan, 2019

As the captain of your very own ship – HMS My Way – you get to plot your own course, pick the colour for your sails, and parley with whoever you please. But although there’s no nagging boss on your back, there’s still a higher power to appease: the taxman. Whether you see him as pirate or protector, you have to pay up or face the tempest of UK law. But how exactly does it work?

In part two of our ‘Like a boss’ series of money tips for our new Annoyed Self-Employed tribe, we ask financial advisors for help with completing the self-assessment gauntlet. You can read the basics on, but these pro tips should make it all a little easier.

Key dates:

  • Register for self-assessment by 5th October

  • Complete paper tax returns by 31st October

  • Complete online tax returns by 31st January

  • Pay the tax you owe by 31st January

Yet another reason to love January

- “Prepare for the new tax year well in advance and make all of the necessary preparations to avoid a last-minute rush to meet the deadline. Anyone who might be concerned about managing taxes could hold back around a fifth of every invoice to ensure that there is enough to cover taxes when it comes down to it. If you’re billing around £80,000 this could potentially increase to about a third but it’s worth seeking guidance from a financial adviser and/or an accountant who can make recommendations based on your individual circumstances.”

Flora Maudsley-Barton, Managing Director at Parsonage Financial Planning

- “Unsurprisingly, January 31st is the busiest day of the year for filing tax returns, with over 750,000 tax returns filed in the last 24 hours alone. Trying to get hold of HMRC at any stage in January can be a nightmare, let alone in the last week. On a positive note, if you file your returns early, HMRC do not wait until January 31st to pay any refunds due. The amount you receive back could be a nice holiday boost or a great way to start the New Year.”

Brian Byrnes, Investment Advisor at Wealthsimple

Learn how to fill out your tax return

Keeping records for taxes and planning

- “From 1st April 2019, self-employed people earning over the VAT threshold (£85,000) will need to keep and submit their VAT records digitally. Often, accounting tools like Xero and Quickbooks integrate with the Government’s software, meaning this doesn’t need to be as confusing as it might sound for the business owners impacted.”

– Seb Maley, CEO of Qdos Contractor

- “Use an online / app accounts package (QuickBooks etc) and keep it up to date. Five mins each morning whilst having a cup of tea works for me. Invoice promptly AND chase for payment (QB etc will auto chase).”

– Dave Lamb, Owner and Advisor at Gibson Lamb Financial Planning

Make the most of tax-free allowances

- “Getting a big pay cheque is always a great feeling but it also means paying taxes on your hard-earned money. Tax-efficient accounts like an ISA can help lighten the load as all money you deposit into an ISA (either a stocks & shares or cash account) grows tax-free meaning what you earn is 100% yours to keep. Another benefit - you don't have to claim any gains on your ISA account in your self-assessment tax return saving you just that extra little bit of paper work.”

– Brian Byrnes, Investment Advisor at Wealthsimple

- “It’s important to use all the tax allowances you’ve got available to you, including pensions, ISAs and capital gains tax. If your business goes through varying peaks and troughs and you end up having well over the allowances for a particular tax year, then you could consider topping up the pensions and savings of your spouse or kids.
- “Another option if you have large, one-off sums is to gift the money into a trust. For instance you could set aside money to pay for school fees for children. Then as soon as any money or investments are put into the trust they are taxed as if they belong to the child, which usually means there is little or no tax to pay on any income or gains.”

– Jon Greer, Head of Retirement Policy for Quilter

Beware of tax avoidance traps

IR35 legislation

If your working arrangement with a client looks more like employment than self-employment, despite being hired through your own limited company, you may need to pay more tax. Some people try to get around it, so the government introduced IR35 to check.

- “In a move to stop this suspected tax avoidance, in the public sector the government has shifted the responsibility for setting IR35 status from contractors to the companies engaging them. The same will happen in the private sector in April 2020.
- "These changes increase the threat of mistakes and risk-averse IR35 decisions, meaning it’s vital contractors have their IR35 status checked by experts to ensure they’re paying the correct amount of tax.”

Seb Maley, CEO of Qdos Contractor

2019 Loan Charge

If you’ve ever used a ‘disguised remuneration loan scheme’, you may be in trouble. These schemes involve employers paying into a trust which receives a tax deduction, then paying out to employees as non-taxable loans that remain outstanding indefinitely.

- “This April, thousands of contractors who were often mis-sold loans as tax efficient and legal schemes will be forced to pay back missing tax to HMRC. Charges apply to outstanding loans as dating back to 1999 and in some cases could cost contractors well over £100,000.”

Seb Maley, CEO of Qdos Contractor

If you’re still new to the self-employment game and haven’t filed your first tax return yet, it’s well worth going over the government’s guidance. And if you haven’t already done so, read up on the rest of our three-part series, Like a boss: a financial crash course for the self-employed.