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UK has seen a significant increase in self-employed individuals in recent years, with more people embracing the flexibility and control of being their boss. This newfound freedom often comes with various tax issues, as self-employed individuals are responsible for managing their own tax affairs. This article delves into the top 10 tax problems self-employed individuals encounter in the UK and offers solutions for tackling them effectively.
Late filing of tax returns: First common tax issue self-employed individuals face is the late filing of tax returns. Missing the deadline for filing tax returns can result in penalties and additional interest charges. To avoid these repercussions, it is crucial to be aware of the filing deadline, which is the 31st of January, for online submissions. Calendars or reminders can ensure that tax returns are filed punctually. Additionally, investing in accounting software or hiring a professional accountant can aid in managing tax affairs more efficiently.
Underpayment of taxes: Underestimating tax liability can lead to underpayment, which could incur penalties and interest charges. To address this issue, self-employed individuals should maintain accurate and up-to-date financial records, accounting for all income sources and deductible expenses. Utilizing accounting software or working with an accountant can help estimate tax liability accurately and facilitate the necessary payments.
Overpayment of taxes: Overestimating tax liability can result in overpayment of taxes, unnecessarily tying up funds. To circumvent this problem, it is essential to claim all applicable tax reliefs, allowances, and deductions to minimize tax liability. Regularly reviewing financial records and consulting with an accountant can help ensure that taxes are not overpaid.
Difficulty with record-keeping: Another challenge self-employed individuals often face is maintaining proper record-keeping. Inadequate record-keeping can lead to errors in tax calculations and missed deductions. Implementing a system for organizing and storing financial records, such as using cloud-based accounting software or a well-structured filing system, can help. Keeping all receipts and invoices and tracking income and expenses regularly can also prove beneficial.
VAT registration and compliance: VAT compliance is a further issue that self-employed individuals commonly encounter. Determining whether a business should be VAT-registered by checking if the annual taxable turnover exceeds the VAT threshold (£85,000 as of 2021) is crucial. Familiarizing oneself with VAT rules and rates or consulting with an accountant can help ensure compliance.
Misunderstanding tax relief and allowances: Many self-employed individuals may need to be aware of the various tax reliefs and allowances available, resulting in missed opportunities to reduce their tax liability. Researching available tax reliefs and allowances, such as personal allowance, trading allowance, and expenses that can be claimed, is essential. Consulting with an accountant can ensure that all possible opportunities are taken advantage of.
IR35 compliance: For self-employed individuals working as contractors, compliance with IR35 legislation can be a significant challenge. This legislation aims to prevent tax avoidance by individuals working as ‘disguised employees.’ Assessing one’s working relationship with clients to determine if they fall inside or outside IR35 is vital. Seeking professional advice can help ensure compliance with IR35 rules and avoid potential penalties.
Making Tax Digital (MTD) compliance: Compliance with the Making Tax Digital (MTD) initiative can also be challenging for self-employed individuals. This initiative requires digital record-keeping and submission of VAT returns using compatible software. Familiarizing oneself with MTD requirements and using MTD-compatible software for managing financial records and submitting VAT returns is crucial. If necessary, seeking assistance from an accountant or software provider can be helpful.
Cash flow management: Cash flow management can be a significant issue for self-employed individuals due to their irregular income, affecting their ability to pay taxes on time. Implementing a robust cash flow management system by tracking income and expenses, creating a budget, and setting aside funds for tax liabilities. Consider using online tools or hiring a financial advisor to help manage your cash flow effectively.
Inaccurate tax codes: Self-employed individuals who are also employed may be assigned an incorrect tax code by HMRC, which can lead to over or underpayment of taxes. To get the correct tax code, regularly review it to ensure its accuracy. If you suspect that your tax code is incorrect, contact HMRC to have it reviewed and corrected. Keep accurate records of your income and tax payments to support your case if needed.
Navigating the complexities of tax can be challenging for self-employed individuals in the UK. By staying informed, keeping accurate records, and seeking professional advice when necessary, you can avoid common tax pitfalls and meet your tax obligations. By proactively addressing these top 10 tax problems, you will save time and money, gain peace of mind, and focus on growing your business. If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.