5 most common tax mistakes when you are self-employed

What’s worse when you’re self-employed? Are you going to have to pay your tax bill or make a mistake and find out you overpaid?

Filing your small business taxes annually doesn’t have to be stressful or painful. Taxes can be a bit of a headache for anyone in business, and it’s no different for the self-employed. The risk of false taxation can result in late, inaccurate, or non-filing tax returns, resulting in significant penalties and time-consuming investigations by the HMRC.

> See also: How the new self-employed should control the complex SEISS process

However, if you make sure you get a little work done year round, filing your taxes can be pretty easy.

5 most common tax mistakes when you are self-employed

Some stresses are easily avoidable. Avoid these 5 common tax return mistakes that many self-employed people make:

# 1 – No self-assessment registration

If you make more than £ 1,000 on one or more trades you will need to register with HMRC. People often mistake this for basic personal compensation, believing they don’t need to register with HMRC unless they earn above a certain threshold.

However, this is not the case.

Everyone has the right to earn a certain amount of money without paying income tax. This is known as the Personal Allowance and is £ 12,500 for the 2020/21 tax year. It is important to know that even if you earn below the Personal Allowance Threshold, you must report your earnings to the HMRC.

Even if you work for an employer, your self-employment taxes are not automatically deducted from your salary. So you need to tell HMRC exactly how much you earned in the tax year and then pay it directly.

To do this, you need to make sure that you have registered as a self-employed person so that you can submit your tax return for self-assessment.

There are deadlines for registering and filing your tax return so you need to make sure you meet these deadlines to avoid hefty fines and penalties. The deadline for notifying HMRC that you are self-employed is October 5th

# 2 – Not filing a tax return on time for self-assessment

One of the biggest mistakes the self-employed make is not to return or forget their self-assessment tax return on time. The deadline for filing your online tax return for self assessment and paying the taxes owed is midnight on January 31 of each year. However, if you are filing a paper tax return, be aware that the deadline is October 31 of each year.

If you miss a self-assessment deadline, you can choose two different penalties. The first is when you are late filing your personal tax return and the second is when you are late paying your personal tax.

If you are late filing:

  • There is an automatic £ 100 fine for being late a day
  • You will be fined an additional £ 10 per day if you are late, up to a maximum of £ 900 (90 days) if you are more than three months late
  • You will receive an additional fine of £ 300 or 5 percent of the tax owed (whichever is greater) if you are more than six months late
  • You will receive an additional fine of £ 300 or 5 percent of the tax owed (whichever is greater) if you are more than 12 months late

If you are late paying for your personal tax:

  • You will receive a 5 percent fee on the tax you owe if you are 30 days late.
  • You will receive an additional 5 percent fee on the tax you owe if you are 6 months late.
  • You will receive one final additional charge of 5 percent on the tax you owe if you are 12 months late

In addition to the fines, you will be charged 3 percent interest on tax owed if it is not paid on time, including amounts accrued in fees. This means the costs can add up quickly, resulting in significant fines. The same regime of fines applies to the submitted contributions.

However, this means that if you miss the submission deadline, you will still have the option to submit online to avoid fines.

> See also: The self-employed should pay the same taxes as employees, says top thinktank

# 3 – Don’t save for taxes

Another big mistake the self-employed make is not saving for their tax bill. It can be a massive shock at times, especially if you forgot to consider social security contributions. It can be difficult to scrape everything together at the last minute if you haven’t been saving up for it all year round.

The best thing you can do is to set aside a percentage of everything you deserve when you deserve it. Create a separate savings account and move your tax money to it every month. Don’t touch it. When the tax deadline is up, you no longer have to worry about finding the money to pay your tax bill because it already exists.

# 4 – Report false income

Incorrect income reporting is another mistake the self-employed make. Many people face penalties and tax surcharges for mistakes made each year across the UK due to negligence or the submission of incomplete financial records to their accountants. This often happens when you don’t keep track of your earnings. You should ensure that all receipts and invoices for everything are kept and recorded throughout the tax year. If you are reclaiming costs, HMRC can provide evidence of this. If you keep a good record, you can take everything into account and avoid possible false positives.

There is a system of penalties for incorrectly declaring your income on your self-assessment tax return. What you will be charged will depend on whether HMRC believes you have been negligent or have purposely tried to lie about your earnings. The penalties are based on the amount of tax you owe and are in addition to the tax owed:

  • If you have taken reasonable care to fill in your return correctly, you will not have to pay a penalty
  • If you have been negligent, the penalty is between 0% and 30% of the additional tax owed
  • If you intentionally underestimated your tax, the penalty will be between 20 and 70 percent
  • If you deliberately underestimated your tax and tried to hide the fact, the penalty will be anywhere from 30 to 100 percent

If you discover that you have made a mistake in your self-assessment tax return, you can correct it online via HMRC or through your software provider up to one year after the registration deadline. You will then need to write to HMRC to explain the circumstances and request a change.

# 5 – Don’t pay social security contributions

National Insurance (NI) contributions help fund the UK welfare state. You will find that NI contributions and income tax are usually combined or paid together through PAYE if you are required to pay them through a self-assessment tax return.

If you are self-employed, there are two types of social security that you typically pay for. The class depends on how much you earn. For the tax year 2020/21 the different classes are:

  • Tier 2 if your winnings are £ 6,475 or more per year.
  • Tier 4 if your winnings are £ 9,501 or more per year.

To avoid fines and penalties while working as a self-employed person, you need to get social insurance. There are two ways you can pay NI if you are self-employed. The first option is to pay through your self-assessment tax return. However, if you don’t pay for it this way, you can choose to pay voluntary contributions. You do this by logging into the HMRC website.

Simon Thomas is the managing director of Oxford-based auditor Ridgefield Consulting

further reading

Taxman gives self-employed people more time to file their tax returns

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