LITRG release tax tips to help self-employed

With latest findings showing that many low income self-employed people don’t fully understand their tax position, the LITRG has published a helpful guide.

ONS figures revealed that the last ten years have seen a significant rise in the number of people joining the contracting sector, many of whom earn a low income, perhaps work in the ‘gig economy’ and are unable to afford paid tax advice.

As a result, the Low Incomes Tax Reform Group (LITRG) has created a guide that explains some of the less common tax rules affecting the self-employed; discussing 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.

Head of Team at LITRG Victoria Todd, commented, “We are concerned that some self-employed people may struggle to get their tax affairs correct because of the UK’s complex tax and benefit rules which seem to be changing constantly, coupled with a reduction in detailed guidance from HMRC. Most self-employed workers want to get their tax right and our online tax guide will help them with the difficult task of staying on top of changes to the tax system while running a business.

“There have been some important changes to the tax system in recent years that affect low-income self-employed workers, with the introduction of the trading allowance, cash basis and simplified expenses, as well as the start of HMRC’s Making Tax Digital for VAT programme. There are also significant changes to the benefits system with the introduction of universal credit which is replacing tax credits, among other benefits.”

LITRG’s five tax tips for low income self-employed:

1. 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.
2. 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).
3. 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.
4. 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.
5. 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.

To find out more about contracting please contact Jaime on 01442 795 100 or email jaime.thorpe@dolanaccountancy.com