A new contractor's guide to self-assessment
Whether you are new to the world of contracting, or an experienced contractor, understanding if you need to fill out a Self Assessment tax return by 31st January 2022 is vital to ensure you don’t fall foul of HMRC.
Here, our partner TaxScouts, an online solution to help contractors and freelance workers submit their tax returns, gives a step-by-step guide to help people understand the Self Assessment process for off-payroll working.
Step 1: Do you need to file a tax return?
The first part of submitting a self-assessment tax return, is to actually understand whether you are required to submit one.
If you have earned income of more than £1,000 from freelance or contracting work then you will need to submit a Self Assessment tax return.
It’s also important to remember that Company Directors may need to submit for Self Assessment if you earn dividends of more than £2,000. From April 2021, IR35 laid out the rules for off-payroll work. Any contractor working through a limited company should familiarise themselves with IR35.
Step 2: Register with HMRC
If you do need to file a Self Assessment tax return then you need to register with HMRC so they can send you a Unique Taxpayer Reference (UTR) number. You’ll need this to complete your tax return and it can take a month or more to arrive. If you are planning to submit a tax return for the 2020/21 tax year, you should have already registered with HMRC. The deadline to do this was 5th October 2021.
The deadline for submitting and paying your 2020/21 tax return online is 31st January 2022.
Step 3: Declare all your income and expenses
One of the most common mistakes people make on their tax returns is to not declare their income correctly. This can lead to late payments and penalties from HMRC.
On your Self Assessment, you will need to declare all your income earned during the 2020/21 tax year, including income that may have been paid to you via PAYE. Remember, income may include dividends paid to you from a company of which you are a director.
You will also need to declare other forms of income. Here are some examples of these other forms:
- Income from property rental
- Selling assets like cryptocurrency
- Savings interest from bank accounts
Declaring expenses will help you to offset the amount of tax you pay, so remember to organise and declare all expenses that are directly related to your income as a contractor. Here is a list of the different types of expenses.
Step 4: Understand your tax free allowances
Tax free allowances will help to reduce your tax bill. Everyone eligible in the UK has a personal tax-free allowance of £12,570 for the 2020/21 tax year.
However, there are other tax free allowances you may be entitled to, including the Marriage Allowance, the Trading Allowance and various property and investment allowances. You may have to apply separately for some of these. Familiarise yourself with all the tax free allowances that may apply to you, as these could reduce your tax bill this year
Step 5: Submit your tax return early
Once you have all your income, expenses and tax free allowances in order, it will be time to submit your Self Assessment tax return.
We strongly recommend that you submit your Self Assessment before the end of the year. This will ensure you have plenty of time to pay your tax bill before 31st January 2022.
If you are in any way unsure about your tax calculations, taxable income, expense claims or tax free allowances, it might be useful to get a professional to help you.