Tax

[thematthewbrennan]

Im new to the freelance graphic design scene and have recently started earning money for work. I have very little in the understanding of paying taxes and was wondering how it works. Once you sign yourself as self employed how does it work? When are you expected to pay taxes in each year?

 

[pcbranding]

Matthew, I'd truly recommend finding an accountant and ringing them to ask the question. They won't charge you as you're an interested potential customer.
Good accountants will always save you more than the cost of their services and naturally know this stuff inside out.

 

[Paul Murray]

Have a read through the HMRC site for self employment.

HM Revenue & Customs: Self Employed

Basically, you need to keep a record of everything you earn from being self employed, so use invoices and start a book or spreadsheet where you list all in your earnings.

You also need to keep a record of all business expenses. This was explained to me as anything you need to run your business. As a designer, it can be software, books, pens, business cards, web hosting, sticky notes, literally anything that you use whilst working. Keep the receipts for anything you buy, and all invoices for work you've done for someone else.

Eventually you will need to fill in a self assessment tax return where you declare your incomings and your out goings. If your earnings are below a certain threshold, you don't have to pay certain things.

You won't need an accountant until you're earning a great deal more, but many offer free consultations so you could take advantage of this and get some free advice. I also heard that HMRC offer a free drop-in service where you can pop down and get free, confidential advice about anything to do with your business so look into that too. You could try a citizens advice bureau too, if you can find one that's still open.

 

[Dave L]

Ring the HMRC and explain your situation: they do give very good, easy to follow advice.

 

[ARRIVALS]

All good information provided here. But very basically as a self-employed freelance designer:

You don't pay National Insurance (Class 2) unless you're earning at least £5,595 a year.
You don't pay Income Tax unless you're earning at least £8,105.
You don't pay or charge VAT unless you're earning at least £73,000 a year.

 

[Katedesign]

All good information provided here. But very basically as a self-employed freelance designer:

You don't pay National Insurance (Class 2) unless you're earning at least £5,595 a year.
You don't pay Income Tax unless you're earning at least £8,105.
You don't pay or charge VAT unless you're earning at least £73,000 a year.

When you sign on as self-employed you will get an NI bill (since June last year I think I've paid £42 or so).
You are still subject to the tax-free earnings allowance. (income tax)
You will pay VAT on your purchases (so I don't quite understand what Arrivals means there) if you are not VAT registered. If you are dealing with businesses (and reselling print) most/many of them will be VAT registered so they won't mind about the VAT and if you are also VAT registered you are able to reclaim VAT you pay out. If you are just dealing in design then it probably isn't worth being VAT registered. You cannot charge VAT unless you are registered.

I would ask an accountant. They will give you some free advice...and they need design work as well!!

 

[Katedesign]

Also keep a monthly tally of all your expenses and business mileage. If you do everything monthly it will help when you have to complete a tax form (or get an accountant to!)

 

[ARRIVALS]

You will pay VAT on your purchases (so I don't quite understand what Arrivals means there) if you are not VAT registered.

My mistake, I didn't mean to include 'pay' in there. Obviously everyone pays VAT, you can just claim it back if you're VAT registered. Thanks for the correction Kate!

 

[ARRIVALS]

Also, I really would recommend finding an accountant. When I first started, I tried doing it myself thinking it wasn't too difficult. After collecting and collating invoices, receipts, bills, outgoings, all payments in and out, I just got swamped. Especially when you have designing to do too! It'll cost you £150 but it's worth the hassle-less month before the self-assessment tax return is due in!

 

[Dave L]

The main advantage of an accountant is that a good one (and do make sure you find someone you can work with) will easily pay for him/herself; handing returns is one part of the job but a proper knowledge of tax allowances, etc. and how they can help you keep as much of your income as you're legally entitled to is the bigger part. In my first year of trading (as a limited company), I took care of everything myself and had a friend of a friend (a senior accountant at Grant Thornton) cast an eye over my figures for errors: there weren't any (it's not difficult at a basic level), but I didn't benefit from that deeper knowledge which, in year two, resulted in me paying only an extra £300 or so in corporation tax on profits that were c.£15,000 higher.

 

[Tony Hardy]

There's a difference between claiming VAT back and tax-deductables isn't there? Fairly new to it all myself.

But if I earn say £20,000. I'll have to pay 20% tax on that, but, if I buy new things for the business, I can offset that against my tax bill yeah?

And that's all separate to VAT?

 

[Dave L]

It is, yes.

 

[Katedesign]

You can claim back legitimate expenses for your business against tax. (ie pay for them out of untaxed income) So any paper, pens, scalpel blades, computers, post, envelopes, printing, business miles, etc. Also if you work from home an allowance for extra expenses (more electricity etc.). So your turnover might be £50,000 and your expenses may be £15,000 so you will only be taxed on £35,000.

If you are registered for VAT you can claim back the VAT on business purchases against any VAT you charge. So in a VAT period where you have charged out £100 in VAT you may have been charged £50 in VAT and so would pay the VATman £50.00. But likewise if you have charged out only £50 and been charged £100 you will get back £50.00.