Filing your tax return - all you need to know

This article is for freelancers, sole traders, and people with side hustles.

The deadline to file your 2020/2021 Self Assessment is almost here. If you’re new to self-employment and this is your first tax return, you might be feeling daunted about this – but there’s no need to panic! You just need to arm yourself with the right information.

In this article, we look at everything sole traders need to know about paying Income Tax and National Insurance, and filing their 2020/2021 tax return. Let’s get started.

How are taxes collected from the self-employed?

When you're employed by someone else, your Income Tax and National Insurance (NI) contributions are automatically collected from your salary. So you don’t need to worry about working out how much you owe, or paying a tax bill.

But when you’re self-employed, managing how much Income Tax and NI you owe – and making sure you pay it on time – is down to you. (We’ll sometimes refer to Income Tax and NI payments as just ‘tax’ through this article to keep things simple.)

All self-employed professionals need to pay their tax through HMRC’s Self Assessment system. This usually gets called ‘filing a Self Assessment’ or ‘filing a tax return’. It’s normally done online (although you can also do it by post).

The process involves providing HMRC with information about your business finances – so, how much you’ve earned, and how much you’ve spent on business expenses and anything else you don’t have to pay tax on. You’ll also need to provide information about any other income you’ve had outside of your self-employed work (like if you also work a part-time job, for example, or make money from renting out a house you own).

The financial year runs from 6th April to 5th April the following year. So for your 2020/2021 tax return, that’s 6th April 2020 to 5th April 2021.

Everyone who’s self-employed and earns more than £1,000 of self-employed income in a year needs to file a Self Assessment.

The good news is – you’ve still got time to do yours before the 31st January deadline.

Here’s a step-by-step guide to doing so:

1. Dig out your Unique Taxpayer Reference (UTR) number

A UTR number is a unique ten digit number that gets issued by HMRC to anyone who registers as self-employed. It will be printed on any letters you’ve had from HMRC about your self-employment.

If you need to do a tax return for the 2020/2021 financial year, you should have already registered for self-employment as the deadline for doing so was 5th October 2021.

After you registered, you would have gotten your UTR number in the post.

If you haven’t registered yet, get in touch with HMRC straight away to explain your situation. If you try to do your Self Assessment without a UTR number, you could get a penalty.

2. Work out how much income you made in the 2020/2021 financial year (including any SEISS grants)

As a sole trader, it’s important that you accurately record all of your earnings. This should be quite easy if you’ve been using a business bank account that’s separate to your personal one. But don’t worry if you haven’t. There’s lots of smart technology available now that makes it quick and simple to split out your income from any other personal transactions. Using an app like Finmo, for example, can help you to easily identify and categorise income payments directly from your bank transactions – even if they’ve been going into your personal bank account.

‘Income’ means both the money you make from your self-employed work, and all other earnings, including profits from asset gains, earnings from any work where you’re employed by someone else, and rental income if you own properties.

It’s important to note that the Government’s Self-Employed Income Support Scheme (SEISS) grants are also classed as taxable income. So, if you received one or more SEISS grants, you’ll need to include it/them when you’re working out how much you earned across the financial year.

3. Work out exactly what you’ve spent on business expenses

You don’t have to pay tax on anything you buy for your business. So when you do your Self Assessment, you’ll tell HMRC exactly how much you’ve spent on business expenses and take this figure off your total income for the year – the result being that you pay less tax overall. To avoid overpaying on your tax bill, you should aim to keep accurate records of your business expenses throughout the year.

A quick note on the trading allowance

If you spend less than £1,000 a year on business expenses, you can make use of something called the trading allowance. This means you can claim a flat £1,000 for your business expenses instead of adding them up individually. (It’s worth noting that you might have more business expenses than you realise though. Especially when you take into account things like home office expenses).

One way to record all your expenses is to keep hold of receipts and use a spreadsheet to record everything. But as with recording your income, there are also apps out there (like Finmo!) that can help to streamline this process and keep things more accurate. They can also be really helpful if you didn’t keep track of your expenses throughout the financial year. A lot of them have automation features that make it easier to go through your bank transactions and identify any expenses.

This hub on self-employed expenses is useful for finding out more about exactly what you can and can’t claim as a business expense.

It’s also worth looking into something called capital allowances. This is another tax relief system that means you don’t have to pay tax on certain costs associated with running your business, like machinery maintenance, research and development, and some business building renovations, among other things. You can read more about capital allowances here.

  1. Work out how much you’ve spent on anything else you can get tax relief on

The Government has schemes in place that mean you don’t need to pay tax on things like charitable donations and pension payments (not all charity donations and pension payments get tax relief – you’ll need to double check). When you file your Self Assessment, you’ll need to provide details of these too.

Just like with business expenses, the sum of your tax relief expenses will get taken off your total income, lowering your tax bill overall.

A quick note on the Income Tax and National Insurance brackets

How much Income Tax and National Insurance you pay depends on how much you earn. You can see what the current tax and National Insurance brackets are here.

How to file your Self Assessment

You can file your Self Assessment in any one of the following ways:

● File it through the HMRC portal, without any assistance from an accountant

● Hire an accountant, who’ll sort your Self Assessment for you and submit it on your behalf

● Use tax software to track your finances through an app – some platforms, like Finmo, will also offer accountancy help and submit your Self Assessment on your behalf.

Important Self Assessment deadlines

You need to pay your tax bill by the 31st of January in your business's second year, but you can pay it sooner than this if you want.

You’ll then pay all following Self Assessments by the 31st of January every year.

Payments on account

You’ll also need to make payments on account twice a year – on the 31st of January and 31st of July. Think of these like advance payments for your tax bill for the following year. The payments are worked out by looking at your tax for the year before. In January, you’ll pay half what you owed the previous year, and in July you’ll pay the other half.

What happens if you don’t have the funds to pay your tax bill?

If you don’t have enough money saved for your tax bill by the deadline, it’s important to tell HMRC as soon as possible. They might be able to offer you a payment plan so you can pay what you owe in multiple installments (you might get charged a bit of interest for this).

Whatever your situation, it’s really important to communicate with HMRC. If you don’t, and you miss a payment deadline, you could be hit with penalties.

What happens if you do miss the deadline?

If you miss the Self Assessment deadline you'll get a £100 fine straight away. You’ll then get three months to pay up. If you still haven’t paid by this point you'll get a £10 daily fine for the next 90 days, increasing the fine to a potential £1,000. That’s why it’s so important to submit your tax return and pay your bill on time, even if you have to amend it later:

You can make changes to your Self Assessment after you've filed it

If you make a mistake on your Self Assessment, you can make changes to it in the HMRC portal. You can do this anytime up to 31st of January the next year.

Here's how to make changes to your Self Assessment >

It can be easy to put off thinking about taxes when you’re self-employed, but all it takes is a bit of research to see there’s nothing to worry about. Once you’ve got to grips with some of the lingo and how it all works, you’ll be able to focus your attention on what really matters – making your business thrive.

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