As a self-employed business owner, you’re likely to be familiar with the annual stress of filing your tax return and well aware of how easy it is to make mistakes when the deadline is fast approaching. Here are some tips to help you avoid some common errors and reduce Self Assessment stress in the build-up to 31st January.
Declare interest on all your bank accounts
Your tax return should include any interest you’ve received across all of your bank accounts for the tax year. Bank accounts that pay tax-free interest - such as ISAs - are exempt from this rule, but you do have to declare the rest of the interest you receive.
You’ll need to declare any interest you’ve received on any bank account that isn’t exempt from tax, so make sure you include:
any interest received for your business bank account
any interest received on joint accounts with another person
any interest received on personal accounts with a bank or building society
If you use accounting or bookkeeping software that calculates your tax return for you, the interest should be added automatically for your linked bank accounts - but don’t forget to add in interest received for accounts that aren’t linked to your accounting software.
Declare business income you haven’t yet received
A common mistake when filing a tax return is forgetting to declare business income that you haven’t yet received. It might seem odd, but you have to declare un-invoiced and unpaid income.
For example, if your accounting year finished on the same date as the end of the tax year (5th April) in 2019, you need to include any income for work completed by 5th April in your tax return - even if you haven’t yet been paid for it!
An exception to this rule is if you’re using the cash basis of accounting. Businesses operating using the cash basis only declare money when it comes in or goes out of their accounts, and so would not need to include un-invoiced or unpaid income on their tax return.
Record your unpaid costs
Given that you have to declare unpaid income on your tax return, it may not come as a surprise to learn that you also have to record unpaid costs.
There are two types of unpaid cost that you’ll need to include:
costs paid after the end of your accounting year (for example, any bills that were unpaid on the final day of your accounting year)
costs for which money will not leave your business bank account (for example, mileage costs for business travel or business use of home expenses)
Businesses using the cash basis for accounting are once again exempt from this rule, as they only declare costs after they have left their accounts.
Employed? Don’t forget to declare salary, benefits and re-paid expenses from your job
If you have a salaried job in addition to running your own ecommerce business, your employer should provide you with a P60 form in April or May each year. Your P60 details how much you earned and how much tax was deducted from your salary in the previous tax year and you’ll need to include these figures on the Employment pages of your tax return.
If you receive any non-cash benefits (such as insurance) or reimbursement for expenses over the course of a tax year, your employer should also provide you with a P11D form. You’ll need to include details of these benefits and expenses on your tax return. If the expenses were incurred entirely in the course of doing your job, including these figures in boxes 17-20 of your tax return should help you avoid paying extra tax on reimbursed money.
Prepare for payments on account
Payments on account can be particularly confusing (especially for the newly self-employed) so it’s important to understand what they are and to prepare yourself.
Payments on account are due twice a year (on 31st January and 31st July) and can be seen as upfront payments on the following year’s tax bill. The amount that you’re asked to provide on account is the same as this year’s tax bill, split over two payments.
For example, if your tax bill for 2018/19 amounts to £1,400, you will be asked to make a payment of £700 on 31st January 2020 and another payment of £700 on 31st July 2020 as advances on your 2019/20 tax bill.
If your actual tax bill is £1,600 when the 2019/20 deadline rolls around, you’ll already have paid £1,400 upfront. In this example, you’ll then be asked to pay a £200 ‘balancing charge’ on 31st January 2021 (in addition to the following year’s payment on account of £800).
If your tax bill is lower than the amount you’ve paid on account, HMRC will refund you the difference.
It’s particularly important to prepare for payments on account if you’re in your first year of business as you won’t have paid anything in advance. This means that in the example above you’d be asked to pay the full £1,400 tax bill as well as the £700 payment on account on 31st January 2020!
Payments on account are applicable to Income Tax and Class 4 National Insurance, and only kick in if they total more than £1,000 for a tax year and you don’t already pay tax at source on 80% or more of your income. If you make 85% of your income from a salaried job, for example, then your employer will be deducting tax from this when you’re paid - so payments on account won’t apply to you.
Make sure you have enough in the bank to cover your tax bill
As we’ve seen above, the cost of paying your tax bill can quickly add up if you don’t prepare properly. This means that the end of the tax year is a good time to take stock of your finances, plan ahead and chase those unpaid invoices.
Ensuring you’ve got enough money in the bank is also one of the many reasons why it’s a good idea to complete and submit your tax return as early as possible.