The tax deadline of January 31st has passed and many sole traders are wiping the sweat from their foreheads after scrambling their books and payments together. It’s this time of year that many business owners tell themselves to get super organised to avoid issues next year and there are several methods for ensuring that you avoid penalties and budget correctly for 2018.
With some proper planning, come next January you won't need to panic over last-minute self-assessments or stress to pull together large sums.
What are Self-Assessments?
All freelancers and limited company owners must file a self-assessment. This basically takes account of all of your profits and expenses and calculates the amount you owe in National Insurance contributions and taxes.
It pays to complete the self-assessment early as it will give you an idea of the amount you owe.
Tips for Filing A Self-Assessment
The first step is to create an online account at HMRC. It can take up to seven days to receive your activation code in the post and you can't log-in without it so it's best. If you already have an account, you can just sign-in online.
You will need to sort through your paperwork to determine your profits and expenses. Remember that profits also include any accrued interest on bank accounts and dividends.
You can charge all business expenses onto a debit card. This makes determining expenses slightly easier as there is a paper trail. Each year you can then go through bank statements and highlight all profits or expenses. This information is then entered into an Excel document. The final amount that you have to pay taxes on is then determined by deducting the tax-free allowance (£11,500) and expenses from the profits.
Most information about self-assessments can be found online on HMRC's help page. This page includes everything from how to register to property tax. It can be far more effective to find information online than attempting to call HMRC. Though I have occasionally found their staff to be helpful and it isn't that difficult, unlike some companies, to access a human representative.
How to Budget for Taxes
If you make over the HMRC profit threshold of £1000, then you'll also be expected to pay half of next year's taxes in advance. As a result, you can often face a hefty tax bill.
One of the best ways to determine how much you will owe is by using HMRC's tax calculator. Once you have a good idea of what to expect, you can budget accordingly. The HMRC Tax Reckoner Tool can help you determine how much to set aside each week or month.
It may be easier to set-up another bank account and then save your tax money into this account.
Tax Penalties and Fines
People that fail to pay their taxes on time, don't pay enough tax, or make a mistake on their form can face fines and penalties.
One of the easiest ways to receive a penalty is by failing to submit your SA by the January 31st tax deadline. Even if you only submit one day late, you can face a penalty of £100. Once payments are more than 3 months late, you face additional penalties which start at £10 per day.
If you do owe taxes and fail to pay these taxes by the 31st deadline, you'll also face a penalty. If the outstanding taxes aren't paid by the 31st of February, the penalty is 5% of the amount. After 6 and 12 months, you'll face an additional 5% fine. Overdue taxes also accumulate interest at a rate of 3%.
Most people fail to submit or pay their taxes on time for the simple reason that they forget. However, you can avoid the penalty if you missed the deadline due to a mitigating circumstance such as the death of a partner or close relative shortly before the deadline, unexpected stay in a hospital, serious or life-threatening illness, or unexpected postal delay. The full list of “reasonable excuses” can be found online.
How to Avoid Penalties
The best way to avoid tax penalties is by planning ahead. You can submit your SA any time after the start of the tax year (April 5th), which gives you nearly 9 months to get your paperwork together. With such a long window, there's truly no excuse to leave it to the last minute. Get your paperwork together early and submit your SA to avoid penalties and stress.
The OM Team