It may not be the most glamorous part of being a self-employed or freelance designer, but tax is an ever-present part of the job.
The UK government has been planning a digital reform for the tax return process since 2015 and back in July, it announced the timeline for the next phase of roll out.
Changes to the tax system can feel daunting, especially for those who have just started out as self-employed. But with proper management, designers need not be too worried according to tax expert and technical director of digital tax software GoSimpleTax Mike Parkes. Here is his advice to designers.
1. Don’t listen to tax “urban myths”
“The man down the pub might sound like he knows what he’s talking about, but don’t listen to tax hearsay,” says Parkes. There are many tax “urban myths” that serve to distort information and the newly self-employed can become confused through no fault of their own.
One myth that Parkes says he hears often is the idea of the self-employed not having to pay any tax for the first two years of operations – while it sounds appealing, and even convincing, it isn’t completely true. Depending on when you register as self-employed, there could of course be a significant gap before your first actual tax payment, but as Parkes says, you should be “thinking about paying tax from day one”.
Another frequent myth is that you have to pay your taxes as soon as you file your tax return. This one, he says, makes people feel compelled to wait until the last minute to file their return, which is unnecessary. While you should aim to file your tax return in the middle of the year, you won’t need to actually pay those taxes until January.
For all urban myths, Parkes recommends checking out the most up to date information on the HMRC website.
2. Do try to do things early
“For anything to do with tax, you should be aiming to do things with plenty of time to spare,” Parkes advises, adding that HMRC figures show somewhere in the region of 45% of people file their tax return within 30 days of the deadline. “That’s a massive number of people who aren’t on top of their affairs.”
Leaving returns to the last minute is one of the biggest contributors to stress around the tax system, Parkes says. Giving yourself plenty of time to go through your incomes and earnings is key. The Making Tax Digital (MTD) scheme will even this out somewhat, because it will introduce quarterly filing in place of annual.
And even before thinking about tax return filings, Parkes says designers should be notifying HMRC of their change to self-employment as soon as possible.
“Ask yourself right at the beginning of the process if you’re really self-employed: are you in control?; can you issue invoices?; can you turn down work?” he says. “Once you’re able to say yes to those questions, let HMRC know – you might not need to file a tax return for 18 months or so, but you need to get into the system.”
3. Don’t ignore your bookkeeping
“Start recording your income and expenses from the minute you start out,” says Parkes. “It doesn’t need to be anything fancy.”
With MTD incoming, digitising bookkeeping is obviously a priority for the near future, he says, but if writing things down gets you into the habit then this is a good place to start. The key is to take a few minutes doing this once a week, rather than spending several panicked hours doing it on the eve of the January deadline.
Beyond making sense tax-wise, good bookkeeping is an effective way of keeping track of your new venture, Parkes adds. If you’re only paying attention to tax once or twice a year, it can be hard to know exactly how your business is faring.
“Is what you’re doing successful? If you realise through your bookkeeping that it’s not able to sustain the lifestyle you want, you can more quickly do something about it, whether that be changing tact or walking away before you get too far in,” he says.
4. Do question what you need from a tax software
A big focus for the upcoming move to digital taxation is tax software – put simply, these programmes can help you log your income and expenses and send income updates to HMRC. As Parkes explains, there are countless options out there for the newly self-employed, so analysing what you actually need from a software is important.
The first place to start will HMRC’s recognised list of tax software – as the name suggests, these have been recognised by government and meet the requirements for MTD. Then, Parkes says, designers should ask themselves what they need the software to do for them and their business.
“Most designers will want a software that is explicitly made for the non-accountant, and one that offers a relatively basic service,” he says. “Some software is built for accountants and the language used may be something you’re not familiar or comfortable with – so shop around to find what’s right for you.”
Most tax software will come with a trial period, so Parkes recommends testing out to find a right fit. If none feel like a good fit and you’re already happy with your own digital system – using a spreadsheet for example – you may also choose to forego a tax software altogether.
5. Don’t forget to make a provision for your tax bill
“One of the biggest elements of paying tax that strikes fear into a self-employed worker is not having enough money to pay your bill when it arrives,” says Parkes.
For this reason, if you’re able to put money away from each payment, this is a good idea. Since 20% is the current rate of tax, he says this amount is preferable but anything you’re able to separate away from the rest of your income is a good start.
“You might not be able to afford a consistent amount every month, but do what you can,” Parkes says, adding that again, MTD should in theory help to make this more manageable in the future. Quarterly filing will give self-employed taxpayers a “better understanding of their tax liability”, he says and therefore provide people with a clearer estimate of what is due at the end of the tax year.
6. Do keep an eye out for expenses
“There are very few tax saving tips these days which you can use to lower your tax bill,” says Parkes. “But one thing that might bring it down a little is paying attention to expenses.”
One of the most useful expenses for designers just starting out as self-employed are pre-trading expenses, Park says. Some equipment that self-employed workers buy before they begin their work can be claimed back on their first tax return as if bought on the first day of working. This can include computers and desks.
“Have a look at what you’re using and put it down on your tax return as a pre-trading expense,” says Parkes. “It may not add up to much, but it could add up to something.”
If you’re unsure whether something counts as a business expense, he says it is still worth writing it down. Not doing so could be an expensive mistake in the long-run.
“Record everything even if you’re unsure -you can always ask somebody later down the line,” Parkes says. “If you haven’t written it down, you’ll never ask the question and you won’t know.”
For the most up-to-date information regarding Making Tax Digital, head here.