Topics Covered Hide
- 1 Who is supposed to send a tax return
- 2 Less common reasons to send a tax return
- 3 Registering to send a tax return
- 4 Noting the differences between a sole trader and a limited company
- 5 Considering the business costs that must be paid first
- 6 Coming up with a business budget
- 7 Assessing your business expenses
- 8 How to tell if you have to pay income tax
- 9 What governments use the income tax for
- 10 How much income tax you have to pay
- 11 Understanding national insurance taxes in the UK
- 12 Analyzing the total income
- 13 Figuring out basis periods yourself
- 14 Preparing accounts in different ways
- 15 Inquiries and penalties
- 16 Conclusion
If you work for someone else or you are retired, the tax will naturally be deducted by the government before you actually get the money – the type of money you only see on your payslip and never in real life. However, self-employed professionals and businesses must report the income themselves in a tax return.
These returns must be done on a yearly basis. There are, however, a few exceptions in specific countries where you could do them twice a year – or a different frequency. In most places, you will be able to do it once a year – at the end of the tax year, which will also vary from one country to another.
Normally, these returns ask for a bit of accounting education. There are certain forms you might need to complete. There are also specific tips and tricks to reduce your taxes. A professional accountant could do that for you.
But on the same note, more and more people try to reduce their expenses, so they attempt doing everything themselves. You do not have to be an expert to complete your tax returns, not to mention the wide variety of tools out there – such as a self-employed tax calculator.
Now, what else do you need to know before using a self-employed tax calculator? Who is this tool designed for?
Who is supposed to send a tax returnMost people with a steady income must conduct a tax return, especially if they work for themselves or run their own businesses. If you work for another company, the tax will be automatically deducted before you get paid – on a weekly or monthly basis or whenever you get paid. So, when do you need to use a self-employed tax calculator and send taxes yourself?
If you are self-employed as a sole trader, chances are you will need to send a tax return. But then, there are some exceptions. It depends on how much money you make. For example, only those who made more than £1,000 will have to send tax returns in the UK. But then, this amount applies before actually removing things that you might be able to claim tax relief on.
On the other hand, those who run a business must also send tax returns. Whether you run the business yourself or you are only a partner, you are supposed to complete and send tax returns on a yearly basis. It makes no difference what type of business it is or how much money it makes.
Now, if your income comes from a pension (you are retired) or you get wages from another company or self-employed individual, you will not need to send a return for this type of income. Again, there might be some exceptions for other sources of income.
If some of your income is not taxed, you must send the return. Even if you have a job or get a pension, getting money from renting out a property implies sending the tax return – you will get taxed for the money you make.
At the same time, tips and commissions are also taxed. Most people working in industries that involve receiving tips (such as hairdressing, hospitality, driving and so on) will not necessarily bother with it if it is not mentioned in official paperwork, yet that is illegal.
Then, do you have any savings that bring in an interest? How about some investments? How about dividends? It makes no difference what you invest in. If your investment earns a profit, you must be taxed on it, meaning you need to complete and send tax returns.
Finally, many countries – including the UK – will tax your foreign income as well. It makes no difference what kind of industry you get paid from. It also makes no difference which country your income comes from – you will be taxed for it.
At this point, for any of the above mentioned situations, the necessity of a self-employed tax calculator becomes obvious.
Less common reasons to send a tax returnUsing a self-employed tax calculator is not all about the self-employed professionals, business people or those who make a profit from other activities – such as investments. There are other reasons wherefore you might have to send a tax return.
For example, you will need to fill in a tax return if you need to claim a few income tax reliefs in the UK. The same country will also ask you to send tax returns to prove that you are self-employed and you need to claim some maternity allowance or perhaps tax free childcare.
At the same time, if your income was more than £50,000 (or your partner's income was above that limit), you will most likely need to fill in tax returns and pay the so called high income child benefit charge.
Just like you have probably guessed already, each country has its own rules and specifications. This is the main reason wherefore you need serious research before completing tax returns. From the same point of view, lots of self-employed professionals rely on an accountant during the first years in activity, before they actually understand how it is done. Once they figure everything out, they use a self-employed tax calculator for their countries and do everything themselves.
Registering to send a tax returnUsing a self-employed tax calculator is one thing. Registering and sending the return over the authority's official website is a completely different thing. Again, each country has its own rules. In some countries, you may need to stand in a queue and do everything in person. However, most countries will allow online applications for a smoother operation.
Whether or not you sent a tax return last year, you will have to register. It depends on what kind of income you need to send the return for. In the UK, you have different ways to register if you are self-employed, not self-employed or a partner or business owner.
If this is the first time you deal with self assessment, the whole job could be a bit of a hassle. You must keep records for pretty much everything. For instance, make sure you download and keep your bank statements in a certain folder – you will most likely need them. You will also have to keep receipts associated with your business or activity – all these things will help completing the tax return by the book. Even if you hire an accountant for this job, they will still ask for lots of documentation in order to do it correctly.
Once registered on the authority's website, you will most likely be allowed to fill in and send the tax return over the Internet. Some authorities also allow using specific software or forms – usually available for download on their websites. Once everything is done, you will have to pay your bills.
Whether you use paper forms or a commercial software, you must use a self-employed tax calculator and send returns for partnerships, trusts and so on.
Trying to manage yourself as a self-employed professional or a small business and the associated expenses will most likely put lots of pressure on you – especially if you are new to this. There is a professional life you must look after, as well as your household and bills. It is daunting to figure out what to pay first, but a little organization can help you work it out.
Noting the differences between a sole trader and a limited companyWhether you register a limited company or you operate as a sole trader, your decision can cause lots of confusion. Most people ask themselves – what is the difference anyway? As a self-employed professional, you do everything yourself. Register a small business and chances are you will do everything yourself again.
What is the difference then?
As a self-employed professional or sole trader, you practically run your business as an individual. When you run a limited company, you are not running the business as an individual. Instead, the business becomes an entity itself. It is run by directors. You will clearly be a director, so you basically become an employee of your own company.
Now, self-employed professionals will also be personally responsible for the business expenses. They are responsible as actual individuals for the potential debt as well. When it comes to limited companies, the business itself becomes responsible for the financial aspects – including debt.
Finally, self-employed professionals will be held responsible for the business debt. Their personal assets will be at risk should they fail to handle finances correctly. Businesses will not hold anyone responsible for debt. Unless you are also a personal guarantee, you will never be held responsible and you will never risk your own personal assets. Instead, the company assets will be at risk.
Now that you understand how business works, you will probably face a series of expenses and each of them has a certain degree of importance. Which expense should you deal with first? Should you use a self-employed tax calculator before dealing with other debt? Here are all the costs explained, as well as the potential consequences of failing to deal with them correctly.
Considering the business costs that must be paid firstEach business out there comes with costs and expenses. Some of them are more important than others, but it does not mean that you can overlook anything. Before using a self-employed tax calculator, it is essential to ensure that it is actually your main priority.
For instance, if you have a mortgage or your rent the business premises, not being able to make your payments will eventually lead to losing the business premises. You may face eviction. If you lease some of the equipment you use, not being able to pay for it will lead to losing it – your stuff will get repossessed.
Bills are just as important. Whether it comes to gas, electricity or water, failing to pay will cause disconnection. There are businesses out there that simply cannot operate without utilities, so you must cover these expenses too.
County court judgments are not to be overlooked either – you could end up with a charging order or a visit from bailiffs. The same rule applies to business rates or failure to pay fines, tax, VAT or national insurance. You risk a visit from bailiffs, imprisonment and even bankruptcy.
You can come up with various arrangements or delays for one payment or another. But at the end of the day, each of them is equally important. Unless you struggle, there are no reasons to overlook these payments.
Coming up with a business budgetSetting up a business budget is one of the easiest ways to figure out what you need to pay, as well as what is available when it comes to payments. In fact, you should have come up with a financial plan before you even started your business. But then, unexpected situations arise on the way. Things are not always going according to your plan, so other financial aspects will kick in later.
As your business grows and you get some more insights regarding the finances, putting together a business budget is fairly simple. Lots of new professionals overlook the importance of tax and other expenses – such as national insurance in the UK.
A self-employed tax calculator will get the job done for you. Often referred to as income calculators, these tools are simple to use and do not require too much experience. You will most likely be asked for the amount you get paid, as well as what you normally spend on your business. The calculator will then figure out what your tax is, plus the national insurance expenses.
A self-employed tax calculator will most likely rely on standard calculations. It is important to find a calculator for your area or country, especially as rules may differ. Your situation may not be standard too. Extra complications will make it a difference and can affect the tax you have to pay. At this point, you may want to consider the services of a professional accountant for debt advice.
Assessing your business expensesWhether you run a business or you are a self-employed professional, it is pretty simple to understand – you will have some business costs that require coverage. There are numerous expenses that vary widely from one business or industry to another.
For example, do you use a car for transportation? Do you need to bring your tools over or perhaps keep some heavy equipment in a van? Are you leasing it? Is it already yours? Even if it is yours, you will still have to pay for petrol. You must tax it as well, not to mention the business insurance for the vehicle or perhaps the regular services. Such expenses add up – they may seem insignificant at first, but they will build up.
Then, while you can use a self-employed tax calculator yourself, there are more accounting operations that might require your attention. If you choose to hire an accountant, all the fees associated with their business must be considered as well. Plus, as if all these were not enough, you will probably have some business insurance as well.
All these costs must be added up and put into the final amount into your calculator. Some calculators will ask you for each cost individually, so there is not much thinking to do – unless you have extra costs that are not so common. Other calculators will ask you for the total costs as a lump sum, meaning you will need to do the math yourself.
Now, different costs occur at different times and intervals. For example, you may have to pay the accountant once a year. As for petrol, you might need to fill up once a week. Your insurance may also go off in monthly premiums – it is cheaper to pay it yearly though.
While it may seem like common sense for many, not everyone might be that good in math. To update a weekly number into a monthly one, multiply it by 52, then divide the final result by 12. You will get the monthly figure then.
To change the monthly amount into a yearly one, simply multiply the figure by 12. On the other hand, if you pay for something monthly and you want to figure out the weekly cost, multiply it by 12 and then divide the result by 52.
Most people will do the math involving weeks only – basically, they will divide a monthly figure by four, but this is not always the case. Results will be far from accurate, as each month is about four weeks and a half.
How to tell if you have to pay income taxIncome tax is charged on almost any type of income, whether it comes to your wages from the job, profits from investments, income as a landlord, pension or profits from a business. Literally any profit you make will get taxed in one way or another.
The good news – if any – is that you will not need to pay tax on all the income you make. Most governments have allowances as well and most people tend to qualify for such deals that come as tax discounts. So, what is an allowance? Simply put, it is an amount of money that you can have without paying tax for it. Such allowances are given on a yearly basis and they may vary from one year to another, depending on the government and local regulations.
In the UK, the personal allowance for 2019 and 2020 was set at £12,500. In other words, if your yearly income does not exceed this limit, you will not have to pay tax for it. It is reduced by £1 for $2 you make above the income threshold until it goes down to nothing.
The income threshold for personal allowance was set for the past years at £100,000, while the marriage allowance brought in £1,250. At the same time, 20% of the marriage allowance was provided as a discount on the tax bill. While similar to a personal allowance or an age allowance, it is different. The other allowances are practically deducted from the income before the tax is calculated.
Then you may benefit from a personal savings allowance too, not to mention the dividend tax allowance of £2,000. On another note, it is worth noting that most of these allowances tend to see an increase on a yearly basis – or at least every few years. Changes are made at the beginning of every tax year.
Understanding the concept of a personal allowance
Everyone will benefit from the personal allowance – the money you can earn each year without paying tax. Once you exceed that number, you pay tax for the extra income. Students are also entitled to this type of allowance. The personal allowance will vary from one individual to another. For instance, it can go a bit higher if you decide to claim marriage allowance. It will also increase if you ask for the blind person's allowance. But then, this is no general rule – the allowance may also decrease.
Most commonly, you will get a lower allowance based on the income, as well as your previous years – if you owe tax from the previous year, your allowance will be smaller.
In the UK, a tax year runs between the 6th of April and the 5th of April. For the 2020-2021 tax year, the personal allowance is £12,500 – not changed from the previous year. If your income for the year is under this value, you should not pay income tax on it.
Those with a massive income will get a lower allowance. Practically, if you make more than £100,000 a year, the allowance will be reduced by £1 for every £2 you make. If you make £125,000 a year, your allowance will be zero – you will pay tax for everything you make.
What governments use the income tax forNo matter where you live, chances are you will pay some sort of income tax. Now, what does the government use that money for? Each country has its own regulations and rules, as well as priorities for spending the collected tax.
In the UK, the HMRC deals with the taxes. The income is then used to fund all kinds of public services. The welfare system will be improved, as well as the education or perhaps the national health system – NHS. The government will also invest in public projects, which may vary widely – housing, roads and so on.
The USA, on the other hand, has a more diversified spending program. The budget is submitted on a yearly basis by the president, then approved by the House and the Senate. The income is split into three different categories.
Mandatory spending will most likely target the health system and social security – child tax credits, housing assistance and unemployment benefits are also included in this category. Such expenses are considered mandatory because they are permanent. Besides, the government cannot decide on a set amount to spend.
Then, there is discretionary spending, which includes stuff for defense and non defense. This amount is appropriated on a yearly basis. Finally, the third category involves the interest. The interest on federal debt varies from one year to another. It was set at $375 billion in 2019.
How much income tax you have to payIncome tax is a broad term used for numerous taxes. It also consists of various bands. In other words, if your income increases, the income tax will also go up. The system is made to be fair for everyone. It would be unfair for people to pay the same amount of tax when some of them make a few times more than others. Therefore, those who make most money will contribute more.
So, how much income tax do you have to pay based on your income?
In the UK, Wales, England and Northern Ireland have the same tax system. Scotland has a different system, which proves that every country may have its own regulations – those in the European Union have similar systems.
If you earn less than £12,500, you should not be taxed on it – you may have some debt from the previous year though. In other words, income tax is irrelevant for this category.
Then, there is the basic rate, which affects a wide variety of workers. The basic rate is set at 20% and covers those with an income between £12,501 and £50,000. Keep in mind that the tax does not apply to the entire income, but only what you make after £12,500. In other words, if you make £50,000 a year, you will pay income tax for £37,500.
The UK has a different income tax for those making between £50,001 and £150,000 as well. If you go in this range, your income tax will go up to 40%. Again, this rule applies to everything you make over the threshold.
Finally, people who make more than £150,000 will be taxed 45% of their income.
The system could be a bit confusing – if you think you have been taxed a wrong amount, you can always get in touch with the HMRC (or the system dealing with taxes in your country) and have it paid back to you.
Understanding national insurance taxes in the UKThe national insurance tax is based on the earnings. It is paid by both employees and employers. Its primary role is to help one's entitlement to particular benefits from the government. One of them is the actual state pension – the other common one is the maternity allowance.
The national insurance tax is slightly different from the income tax because it is not taken on a yearly basis. Instead, small parts of your income are taken whenever you get paid, be it weekly or monthly – other arrangements are also accepted. If you do some overtime during one month and make more money, you will also pay a bit more on the national insurance. Then, if your pay is a bit lower on the next payslips, you will not be able to claim some of this tax back.
The national insurance – just like the income tax – is not paid for every type of income. Instead, over the 2020-2021 tax year, the tax kicked in whenever you made more than £183 per week. If you make under £962, you will pay 12% out of your earnings per week. If you make more than £962 a week, you will only pay 2% of your weekly income.
Just like the income tax, the national insurance tax is part of the amounts of money you never get – you can see it on the payslip, but this is pretty much it. These taxes are taken before the employer actually pays you.
National insurance taxes will stop once you reach the age required to qualify for the state pension.
Analyzing the national insurance tax for the self-employed
The national insurance tax is not always mentioned in a self-employed tax calculator. Such calculators are most commonly used for the income tax, but you might be able to find a few exceptions that go into smaller details. Generally speaking, there are two types of national insurance taxes that self-employed professionals must pay for.
One of them is referred to as class 2 and it applies when the actual profits exceed £6,475 per year. If you make more than £9,501, you will qualify for class 4. Each of these taxes has its own particularities. You can get an idea about what you have to pay by working out your profits. Simply get the final self-employed earnings and deduct the actual expenses.
Now, how much national insurance tax do you have to pay? If you qualify for class 2, you will pay £3.05 per week. If you qualify for class 4, it depends on the income. If you make between £9,501 and £50,000, you must pay 9% of your actual profit. If you make more than £50,000, you will pay 2% on your profits. Again, things may change over a new tax year.
Whether you qualify for class 2 or class 4, you will most likely be able to pay your national insurance tax over a self assessment. You basically tell the HMRC when you become self-employed and complete your profits over their website.
Different jobs may come with different rules. Using a self-employed tax calculator that targets the national insurance too may provide inaccurate details. For instance, some professions do not necessarily require people to pay the national insurance tax through a self assessment, yet people working such jobs can pay voluntary contributions if they want.
People involved in businesses that deal with properties or land can avoid the national insurance tax, as well as ministers of religion who do not get wages. Examiners, people who work on exam questions and moderators can also avoid it, as well as those who make various investments – not business investments though and no commissions.
Exploring the differences between gross and net pay
The gross and net pay may come into play when using a self-employed tax calculator, but also when working out your taxes. Most commonly, these terms are used when dealing with wages – employers and employees.
The gross pay represents the amount of money received by an employee before deductions and taxes kick in. If someone tells you they will pay you $50,000 a year, it means you will get $50,000 in gross pay.
The net pay is what you are left with after all deductions are taken. This is the kind of money you get in hand or in your bank account – a more realistic approach of what you are about to get.
Obviously, most people will care about the net pay, rather than the gross pay. But then, the gross pay is just as important in a few different situations. For example, it will affect your position in the taxing system. Sometimes, you might make more money if you get less gross pay because taxes are lower. Once you get over a certain level, taxes may skyrocket, meaning you might end up with less net pay. On the same note, there are situations when various institutions will consider your actual gross pay before making decisions – such as banks when you apply for a mortgage.
How to work out your taxable income as a self-employed professional
The taxable profit is easy to work out and it is normally based on the profits given by the business account – once you are done adjusting them according to the laws and regulations regarding tax. A little education is highly recommended to ensure a good final result. It is worth noting that things have changed starting with the 2017-2018 tax year in the UK. Simply put, there are a few reasons wherefore you may not need to do these calculations. This is when the trading allowance kicks in.
Is the total income for a tax year less than a trading allowance? You can then decide to use the allowance, meaning your profits will not be taxed for that year. Then, you can also choose to claim a round sum that equals the trading allowance. It is an alternative to the actual expenses you have dealt with during the tax year. At this point, the taxable income becomes the excess of the income over the allowance for the respective year.
It is worth noting that you cannot really come up with a loss if the trading allowance exceeds the trading income.
Analyzing the total incomeThe total income – also known as the gross income – refers to all the money you make during a particular accounting period. This type of total income could be referred to as sales or perhaps the turnover. Such things will help your business records and further planning, while calculating the final number should not give you too much headache.
Many businesses are able to record the income and associated expenses on a cash basis. To keep it simple, your gross income covers the number of sales received within the respective accounting period.
Working out the gross income might be a bit more difficult for certain workers. If you work in the construction industry, chances are you pay for the CIS – Construction Industry Scheme – as well. These deductions will be taken before you get your money. They may affect the gross income if you forget about them.
The concept of a basis period
The basis period is a commonly used term when it comes to accounting or using a self-employed tax calculator. This period defines the amount of time for which you are charged tax in a specific year. If you work continuously throughout the year, the basis period covers a financial year, so it ends whenever the tax year ends.
Now, what is the tax year? In the UK, the tax year begins on the 6th of April and ends on the 5th of April. While not always a general rule, accounts are out on a so called accounting date – the same time every year. You need to choose something that is convenient for your self-employed activities and working schedules.
From the government's point of view, the 5th of April is the most convenient day. However, it does not work for everyone, so you have a few other alternatives. Pick any day between the 31st of March and the 5th of April and it will be treated as the 5th of April. This tiny bit of flexibility aims to make things a bit easier for people.
Some others choose the 31st of December to make up their accounts. They find it confusing to deal with calendar years and tax years, so they mix them up in one date. If you choose this day, it will become your accounting date. The 12 months prior to this date will be your accounting period.
Again, different people have different needs. If you start trading on the 1st of July, the first accounting period will not exceed six months. Further accounting periods will cover 12 months each.
Figuring out basis periods yourselfSo, how do you know your basis period when you became self-employed? During your first year in the trade, you will count your basis period from the first trading day until the upcoming 5th of April. Keep in mind that an accounting date falling between the 31st of March and the 5th of April will be treated as the 5th of April. If, for example, you become a self-employed professional on the 1st of August, your basis period for that year will finish on the 5th of April, next year.
What happens after the first basis period? The second year will bring in a few different scenarios.
Assuming that you have come up with accounts for 12 months or more and these months end in the second tax year, your basis period will cover the 12 months that end on the accounting date. You started trading on the 1st of August 2019. Your draw up your accounts at the end of the year – the 31st of December 2020 – and you stick to this date.
The basis period for your first year will go from the 1st of August 2019 to the 5th of April 2020. The second year will cover you from the 1st of January 2020 to the 31st of December 2020. Starting with your third year, there would be no more confusion. Drawing lines and reaching these dates involve an overlapping period, which is calculated on a strict time basis.
The second scenario involves having no accounts ending in the tax year. In such a situation, your basis period will go based on the tax year dates, from the 6th of April to the next 5th of April.
In this scenario, imagine trading on the 1st of February 2019 initially. You will draw up your accounts to the 30th of April 2020, meaning the dates might be a bit confusing. In this case, your initial set of accounts will be over in the 2020-2021 tax year, so you have nothing for the 2019-2020 tax year.
This situation is fairly simple to understand. Your first basis period will be from the 1st of February 2019 to the 5th of April 2019. The second year will cover the 6th of April 2019 to the 5th of April 2020. Starting with the third year, your basis period will cover the 12 months before the 30th of April.
Finally, the last scenario implies preparing a set of accounts ending in the tax year, but over a period shorter than 12 months. At this point, the basis period will cover the first 12 months of trading.
If you started trading on the 1st of January 2019 and drew your first accounts to the 30th of June 2019, the basis period for your first year will cover you until the 5th of April 2019. The second year will go from the 1st of January 2019 to the 31st of December 2019. The third year will go up to the 30th of June 2020.
For any of these situations and examples, you might have noticed that a few periods overlap. It looks like you might be taxed twice in different tax years, but this is not always the case. You can only be taxed on the income. Overlapping profits can be used later on to reduce your tax, so money is not lost.
Now, when can you use overlapping profits? There are two different scenarios here. First, you could use the overlapping profits if you stop trading. Second, you can use them if you change the accounting date to a different date – closer to the 5th of April. Make sure you keep notes of the overlapping profits, as well as the months they relate to. You can also carry the overlapping returns until you want to use them.
When you stop trading, previously unrelieved overlapping profits will be deducted from your current profits. Imagine you are carrying forward about £15,000 in overlapping profits. You come up with the last set of accounts for the last year – your profit is £40,000.
If you stopped trading, you could deduct the overlapping profits from the taxable one, meaning you will have to pay tax for £25,000 only. If you did not stop trading, you would have paid tax for £40,000 instead. You could have carried forward your overlapping profits then.
Changing the accounting date – Is it possible?
Using a self-employed tax calculator could be simple and intuitive, but there are aspects related to it that may make the whole operation very confusing. Your accounting date could be one of these factors, so how about changing it?
The good news is you can change the accounting date. The bad news is it may not always be possible. To change this date, you would have to contact the HMRC and explain the reasons behind your request. Why is this change necessary? Do you have a reasonable argument? If you do, the change request will most likely be accepted. For instance, you might be running a second business and you want both of them running on the same accounting date. Then, there is also an option to be rejected – you will have to stick to the existing date.
What could happen after you change the accounting date? There are two different scenarios then. If the new accounting date is over 12 months since the end of the previous basis period, the new basis period will go from that day to your new accounting date.
The second scenario involves a date less than 12 months away since the previous basis period ended. The new basis period will cover the last 12 months to the new accounting date – meaning you will end up with some overlapping profits.
Preparing accounts in different waysA self-employed tax calculator will help you get ready for the tax year, work out your taxes and figure out what to pay. It is not an official accounting tool and there are lots of options out there – many of them available for free. Small particularities may ask for a professional accountant.
At the same time, a self-employed tax calculator is self explanatory – it will calculate your taxes based on your income. It will not prepare the accounts for your work. You will have to do that yourself or simply hire an accountant. Now, how do you prepare accounts?
Preparing accounts is a must. This way, you can figure out your actual profits from self-employment – or, in a more negative case, your actual losses. You can get everything ready by working through your business records. Such accounts must show all transactions related to your business and work over the accounting period. Records will provide access to the income and records regarding the expenses. You can then determine whether or not your expenses will be taxed – and if yes, how much.
Accounts can be prepared in different ways – you might have to do them on an accruals basis or perhaps a cash basis. What does each option imply?
The accruals basis is a historical approach. This is how accounts used to be prepared in the UK – the one and only option. Things are a bit more diversified these days. What does it mean? Simply put, all the profits, earnings and expenses over the respective accounting period will be included in this report – it makes no difference if they are paid or not.
For instance, imagine invoicing someone on the 31st of December. You then prepare your accounts during the same day. This new invoice will be included, even if the customer has not paid it yet. On another note, imagine paying your yearly insurance on the 1st of July. It will cover you for a full year. If you draw up accounts on the 31st of December, you will only include half the bill – even if you have actually paid it all.
To keep it simple, the paperwork is independent to the money flow.
Then, you have the cash basis, which tends to be more accurate. In this case, you will look at the actual money you receive, as well as the expenses that you have actually paid during the accounting period.
There are certain criteria that may allow you to swap from one type of basis to another. The cash basis is more appreciated among self-employed professionals, but not always possible. It is always worth inquiring about it.
Inquiries and penaltiesYou do have rights, but you may also face some uncertainties or difficulties when paying tax. A self-employed tax calculator will help you get an idea about what you have to pay – assuming there are no special considerations. But then, it will not solve your problems. So, what kind of self-employment issues are you likely to face and what are the potential consequences?
In the UK, the HMRC may carry an investigation – also known as an inquiry. It sounds harsh, but it is not as bad as it may seem. The HMRC will double check your records. It will look at your income, expenses, tax credits and income tax. You will most likely have to answer some questions regarding the records. In some situations, you might have to bring in a few more documents.
The HMRC has the right to ask for extra documents in order to determine the outcome of the investigation. There are more types of inquiries out there. An aspect inquiry will only cover a few areas of the tax affairs, while a full inquiry will check everything related to your taxes. Such inquiries are less likely to occur before sending in your tax returns, but later on.
Why do these investigations occur? First, you might be chosen at random. The HMRC likes to perform such investigations randomly, only to encourage people to deal with their tax affairs the right way. In other cases, the HMRC might conduct an investigation if there seems to be an error in your tax return. If the income you show does not seem to cover your lifestyle, you might be investigated. Either way, you will be told why this investigation occurs – whether it is random or it has a reason.
If the investigation has a negative result for you, you might have to pay extra money. The amount is negotiated during the investigation. It could be a small amount or perhaps a substantial amount that you are simply unable to cope with. If you find yourself unable to pay the outstanding balance, you may have to negotiate with the HMRC – attempt paying in monthly installments.
Make sure you approach the HMRC officer dealing with your inquiry as quickly as possible.
Situations that could trigger an investigation
There are more reasons wherefore the tax authorities in your country could start an investigation against you.
Late payments are some of the most common issues out there. A late payment will trigger an investigation – plus, you will also have to pay interest on those payments. The charge is automatic and applies to the delay time. If the dates given by the HMRC are correct, you will have to pay the difference and the interest. If there is an error by the HMRC, you can ask to correct the calculation – this is why it is important to keep records of when and how you made payments.
Late submissions also come with some penalties. Sending in tax returns later than you should will expose you to some fees. In the UK, you will pay a standard fee of £100. If the returns are over three months late, you will be charged £10 per day – for a maximum of 90 days. You will need to pay whatever is higher – £300 or 5% of the tax due – if you are over six months late. A similar fee applies if you are 12 months late.
Such penalties will come with some letters from the authorities, which will tell you more about the investigation and the fees.
Other fees include the failure to notify fine. You must tell the HMRC about changes that may affect the tax, such as a new source of income that might be taxable. This fine could be given in addition to other penalties. This fine is not set, so it is calculated based on the unpaid tax as a result of your failure to notify the authorities.
You might be charged a penalty if you make errors too. This is why it is important to make sure you know what you are doing. A self-employed tax calculator is not an official tool. It will help you out and give you some ideas about how much tax you need to pay, but competing paperwork is your job. A simple mistake could bring in a hefty fine.
A simple error on the paperwork you send could cause a fine, especially if it affects the tax liability. You could also be charged if the HMRC sends you a letter that understates your tax liability – you must tell the HMRC about it. The fine is based on how much tax you failed to pay.
The potential tax revenue is the tax you failed to pay as a result of an error. While this case is rare, the lost tax might be higher than the actual tax. Unprompted disclosures imply telling the authorities about errors before they actually start an investigation. Now, while some aspects are crystal clear, not everything is. Some elements are variable – such as your behavior.
An error can be careless if you simply failed to look after the tax issue – it is not done on purpose though. Then, the behavior could be deliberate – at this point, the burden can be hard to cope with. The HMRC must prove that you did it on purpose – such as omitting income from declaring your overall earnings.
False entries in your records are also considered to be deliberate. If the authorities choose to make an investigation, you must confess straight away. Other actions that might hide the truth are also considered deliberate – such as getting rid of documents.
All in all, if an error is accidental, make sure you contact the authorities as soon as possible. This will minimize the potential penalty – it helps even if the investigation has already started.
Good excuses when making mistakes with your taxes
Some mistakes or problems could make good excuses when trying to dodge the penalties from authorities. Many times, such penalties are issued automatically, so you will not be asked about anything upfront – you will need to appeal them yourself.
For instance, you might be late with the tax returns because your child was seriously ill before the big date. That is a reasonable excuse and you are likely to be forgiven. Problems with online filing may also be acceptable. Whether you are trying to recover your password or the system failed on you, the excuse is quite reasonable.
Generally speaking, pressure of work is not acceptable, but it depends on the situation, urgency of the work and so on. If you had an unexpected increase in work straight away, you might get away with it. A mental or physical disability could also cause issues, whether it is temporary or permanent. It might be seen as an acceptable excuse.
Even if you get an agent to do the job and they fail, you could still be excused if the agent has faced any of the above mentioned problems. For example, if the agent's partner has passed away, dealing with this issue would become a priority, so the authorities will most likely understand.
What self-employed tax calculator to choose
The truth is there is no such thing as the perfect self-employed tax calculator out there. A simple search over the Internet will give you plenty of results. Make sure you find something designed for the tax system in the country you work in.
Some calculators are simplistic and only ask you for your income and expenses. Some others are more comprehensive and may require multiple fields to complete, such as your national insurance tax and contributions.
All in all, none of these calculators is an official tool for the authorities in your country. It will help you gain some ideas regarding your upcoming tax. Not sure whether or not it is accurate? You can always try out the next self-employed tax calculator in your search results. Try out a few more and you should get an average idea of what you will have to pay.
Lots of people do taxes themselves. They go through the form they have to complete and keep receipts for everything. Then, you can also get in touch with an accountant for your yearly accounts. Such services do not cost a fortune, but they will save you time and hassle. They might as well save you some money for all the time you spend researching rather than working.
Keep in mind that a self-employed tax calculator is a great tool, but not the most accurate one in the world. Doing taxes by ear could lead to significant errors and mistakes, which will inevitably bring in some hefty fines and penalties from the authorities. Moreover, specific small details could affect the final result.