Is it a hobby or are you self-employed?
In these uncertain times many people are looking to have more than one string to their bow as regards sources of income. Many businesses start in a small way as a hobby, perhaps making and selling products or providing services to family and friends. Some stay small and others grow into national, or even international, businesses. At what stage should you tell the tax man?
Are you trading?
HMRC will consider that you are trading if you are regularly selling products or services with a view to making a profit. You can do this by doing casual jobs; selling things regularly at car boot sales, auctions, face to face or online; receiving commission on things you sell for other people or companies; letting other people use your tools or equipment for a fee; letting property that you own, including your own home, via a service such as Airbnb. This article will not cover income from letting.
If you earn under £1,000 a year from your self-employment you do not need to report it to HMRC. If you earn more than £1,000 you should inform HMRC.
When should I tell HMRC?
The tax year ends on 5 April. If you started self-employment in the tax year you should notify HMRC by 5 October following the end of the tax relevant tax year. Failure to notify can lead to a penalty being imposed. If you do not already complete tax return, HMRC will issue you with a reference number and you will need to file returns annually to declare your self employed income which will be subject to income tax and, depending on the level of your profits, to class 2 and 4 national insurance contributions.
What records should I keep?
You should note the date your self-employment started. You can decide when you want your accounting year end to be, for simplicity many people make up their account to the end of the tax year, 5 April.
You should keep very accurate records of all your income and expenses, you can do this on paper, a spreadsheet or an app. You should keep your receipts as evidence of your spending. You can claim for the cost of such things as materials, stationery, insurance, postage, some equipment.
If you travel for your self-employment you need to keep a record of the dates and mileage travelled. You can only claim for travel that was wholly and exclusively for your self-employment. The easiest way to claim for travel expenses is to use the flat rate amount of 45p for the first 10,000 miles and 25p a mile after that.
What will I pay tax on?
At the end of the year you deduct your expenses form your income to establish what your profit was. If your total expenses are less than £1,000 you can deduct £1,000 from your profit instead. Your profit will be taxed to income tax. If you have a job as well as self-employment, your personal tax free allowance will have been allocated against your employment income so your profit will be taxed at basic, higher or additional rate depending on the level of your income. If your profit exceeds £6,475 you will pay class 2 national insurance and if it exceeds £9,500 you will pay class 4 national insurance. Most people pay these through their self assessment tax return.
When will I pay tax?
Normally tax from self-employment is be payable by 31 January following the end of the tax year. However, if you are in employment, your tax bill is less than £3,000 and you filed your return before 30 December HMRC can collect this through you tax code for the next year. This means you will pay 1/2th a month rather than paying a lump sum in January.
Payments on account
In some cases where your tax bill exceeds £1,000 you may be required to make payments on account in January and July. These will be based on the tax for the year for which you have just submitted a return.
Self-Employment Income Support Scheme
If you took the plunge and made your self-employment your main source of income within the last couple of years and have suffered financially due to the pandemic with your turnover reduce by 30% or more, you may qualify for the government’s self-employment income Support Scheme. You need to be able to demonstrate your self-employed status, if you completed your 2019/20 tax return on this basis you can go ahead and make a claim for the fourth grant from next month.
If you would like further advice on self-employment or tax matters please contact Denise Baugh
Denise Baugh: Direct dial: 0207 201 3575 Email: DeniseBaugh@childandchild.co.uk