Cheat sheet: Getting to know the basics
- What is HMRC?
- It stands for Her Majesty’s Revenue and Customs (crikey!). It's basically a Government department in charge of all taxes in the UK - so they're pretty important! You will register as self-employed with HMRC and submit your tax return to them as well. You'll often see links to the HMRC website in our articles - we like to keep it simple and let you know where we get our info from!
- What is tax?
- Tax is a compulsory contribution enforced by HMRC and it funds all the things the government is up to (like the NHS). Pretty much any time money changes hands, the government takes a 'cut' as tax - the most important one for us, as self-employed performers, is income tax (literally a tax on your income). The amount you pay depends on how much income you earn.
- What is a tax year?
- A tax year is the period of time over which HMRC measure how much tax you should pay. A tax year runs from the 6th April to the 5th April the following year (don't ask us why, we think it's awkward as well... but it's important to remember). The phrase 'tax-free threshold' is the amount of money you can earn before you owe tax to HMRC. This amount changes yearly - for 2017/18 it is £11,500 and for 2018/19 this is £11,850. If you earn less than this, you shouldn't be paying tax (but you may have to pay it and ask for a refund - see 'What is a tax rebate?' below).
- What is the tax-free personal allowance?
- This is an amount of money you can earn before you owe tax to HMRC. The 'threshold' for the personal allowance changes yearly - for 2017/18 it is £11,500 and for 2018/19 this is £11,850. If you earn less than this, you shouldn't be paying tax (but you may have to pay it and ask for a refund - see 'What is a tax rebate?' below).
- What is a tax rebate?
- A tax rebate is a refund from HMRC when you have paid more tax than you owe. This is likely to happen if you do employed work (the type which you are taxed for at the point that you are paid), but you don't earn more than the tax-free threshold that tax year.
- How do I know if the work I am doing is employed or self-employed?
- When you do employed work (also known as PAYE – Pay As You Earn), it is taxed automatically. You should get a payslip each month telling you how much you earnt and how much tax you have paid. Employed work DOES NOT require an invoice. When you do self-employed work you are responsible for your own taxes (this is why we have to do a tax return for HMRC); either you or your agent will need to send an invoice for the work you have done.
- What is a P60/P45? And the difference?
- This relates to EMPLOYED WORK ONLY. You should get either a P60 or a P45 every tax year from each employer that you have worked for during that tax year. It is essentially a summary of your pay from that employer during the tax year. It will also include any income tax or National Insurance contributions that have already being paid to HMRC for you. The difference is: you receive a P60 at the end of the tax year if you are still employed by an employer, but you get a P45 as soon as your employment has ended with them.
- What are expenses?
- We've tried to capture it all in our article, so please let us know if we've missed something. The key thing to ask yourself is "Am I spending money on something solely related to the running of my business?". Remember! You need to keep your evidence! When it comes to doing your tax return you DO NOT need your evidence (just a total figure) however, if your accounts are investigated you WILL NEED EVIDENCE. They don’t need to be categorized or anything just in a safe place!
- What is a tax return?
- It is a form you fill in on either online (HMRC website) or on paper (you can order a paper form from HMRC). You will do one each year. You will state your income (self-employed only OR a mixture of both self-employed and employed) and a sum figure of your allowable business expenses during that tax year. For your business expenses, it is just a total figure required with no evidence needed. HOWEVER, you will need your evidence somewhere safe should HMRC investigate your accounts. When complete it is used by the tax authorities to assess if you owe any tax to HMRC or are owed a tax rebate.
- When is the deadline for my tax return?
- You have from the start of the next tax year (6th April) until the 31st January to complete your tax return online. The deadline for paper submissions is October 31st. Eg. If you are completing a tax return for the year 2016-2017, the deadline will be 31st January 2019 for an online submission and 31st October 2018 for paper submissions. FYI if you miss the deadline, there are fines!
- What are my responsibilities to HMRC?
- You pretty much need to follow the steps on the homepage. In order to work as a self-employed performer, you must:
- Register as self-employed;
- Keep track of your income and expenses - we use the SansDrama Online App to record ours; and
- Submit your annual tax return to HMRC.
- For expenses, you want to be asking for VAT receipts whenever you buy anything that can be considered a business expense. You won't be asked to provide this evidence of your expenses at the point that you submit your tax return, but you will need to hold onto this in case you get selected for a random audit (it happens!). You should hear within a year if you are going to need to provide it, but you should be holding onto it for 5 years!
- For employed income, you want to hold onto either a P45 or a P60 for every employer you worked for in the tax year. Self-employed work needs you to keep your own records - the SansDrama Online App makes this a doddle. You don't need to worry so much about keeping evidence for this, just make sure you are telling HMRC about all the money you earned in the year.
We're with you all the way, so you have a question or you're just confused then you can always get in touch! If you come across a term you don't understand, we can add it to this page too!
Love Jo and James x