If self-employment is new to you, it can be difficult to know where to start and what it all means. Even as a bookkeeper, taxes can be tricky to get your head around.
Here I show you how to get started as a Self-Employed Bookkeeper, unravel some of the confusion around taxes and get you prepped for doing your first tax return.
What is Self Employment
Self employment means that you work for yourself rather than for someone else. This means you:
- Are responsible for finding your own work;
- Decide when you want to accept a job;
- Need to have your own method of transport, mobile phone and equipment;
- Will not receive sick pay or holiday pay, so you will go without earnings during these times;
- Make sure you have the right qualifications to operate;
- Take out your own insurance;
- Need to register as self employed, work out your own taxes and send a tax return to HMRC.
You are not restricted to just being self employed either. You can even hold down a full time job while working as a Self Employed Bookkeeper on the side.
Useful Reading: Being Employed and Self Employed
What Taxes Do You Pay as a Self Employed Bookkeeper
Earnings mean all the money you are paid as a Bookkeeper less expenses and other allowances you are entitled to.
All Self Employed Bookkeepers must register with HMRC and declare their earnings. Earnings may be tax free because you earn below the personal allowance, however you still need to declare everything to HMRC using a self assessment tax return form.
There is one exception however.
You only need to register and pay tax on your self employment income if you earn more than £1,000 in a tax year (6 April to 5 April). If you make less than £1,000 as a Bookkeeper then it’s tax free and you don’t need to declare it. Useful if you wanted to just test out life as a Bookkeeper or just earn a small amount on the side. This perk is called the HMRC Trading Allowance.
How to Register as a Self Employed Bookkeeper
If you make more than £1,000 as a Self Employed Bookkeeper or you intend to build up a steady self employment income then you should register with HMRC.
Remember a tax year runs from 6 April to 5 April. And when it comes to taxes get used to thinking of everything in this way. It is on this you need to work out your earnings and taxes for HMRC.
When to Register as a Self Employed Bookkeeper
Officially you should register by 5th October in the second tax year of being a Bookkeeper.
So if you became a Self Employed Bookkeeper on 1 April 2018 then you would need to register as self employed by 5th October 2018.
How to Register as a Self Employed Bookkeeper
You can register as Self Employed online. It’s fairly easy to do yourself and I’ve put together a video guide here.
Useful Reading: How to Register as Self Employed Video Tutorial
What Are Expenses
One of the perks of being self employed is that you get to set off costs against your income. This reduces the amount of tax you have to pay.
There are rules set out by HMRC which expenses you can claim for (allowable expenses) and those you can’t (disallowable expenses).
Allowable Expenses for Self Employed Bookkeepers
In the main anything you need to pay for in relation to working as a Bookkeeper will be allowable or “tax deductible”. Here are some typical allowable expenses:
- Computer & printer;
- Marketing or paid advertising;
- Office rent;
- Phone and Data;
- Use of home if you choose to work from your house either as a flat rate or a potion of your household bills gas, water, electricity or rent.
- Travel to clients when you use a taxi, tube or bus;
- Mileage claim for using your own car (currently 45p for the first 10,000 miles of driving and 25p thereafter);
- Training to keep your skills up to date, along with incidental travel and food costs or overnight stays;
- Accounting & bookkeeping;
- Bank charges for a business bank account.
There may be expenses you pay for that you use personally, like your mobile phone. In these cases you can only claim a portion as an allowable expense.
So if you use your mobile phone for 60% work and 40% personal, then you take 60% of the total costs to put against your taxes.
Disallowable Expenses for Self Employed Bookkeepers
After years of people pushing the boundaries and claiming for some questionable expenses, HMRC have a growing list of expenses that are disallowable.
Here are some common examples of disallowable expenses for Self Employed Bookkeepers:
- Parking fines
- HMRC penalties;
- Non branded clothing;
- Travel to your base of work;
- Lunch, unless in special circumstances;
What Records Should You Keep
Once you are self employed you need receipts to support all the expenses you want to claim You’ll also need to keep reports to document any income you receive from your customers however they pay you – cash, card or bank transfer for example.
The simplest way to do this is to:
- Open up a separate bank account for yourself and set this to send/receive any payments. That way when tax time comes you have a record of everything that has happened.
- Save all your receipts and reports in the cloud using google drive or dropbox (both are free up to a certain amount of storage).
If you want to go one step further then you can set up a bookkeeping spreadsheet or use an app like Freeagent. Whichever you choose, these will help you track your earnings and tax liability (avoiding any nasty surprises at tax time).
What is a Bookkeeping Spreadsheet?
A bookkeeping spreadsheet is a simple summary of your income and expenses. You can set one up on Google Docs or Excel and it is best to have one for each tax year.
A bookkeeping spreadsheet is a good idea because:
- They are free to set up
- Gives you the figures you need to estimate your taxes
What can a Bookkeeping App Do For You?
Bookkeeping apps are an automated way to record your income and expenses. There are a few out there now but the best ones should have these features:
- Connect to your bank account to automatically pull transactions;
- Store copies of your receipts;
- Estimate your taxes on an ongoing basis;
- File your tax return for you.
The downside is choosing an app comes with a cost but this is for most people is outweighed by the time saving and avoiding the need to find an accountant to file your tax return.
I use Freeagent to log all my income and expenses. It ticks all the boxes in terms of functionality and is reasonably priced.
What is a Self Assessment Tax Return Form
A tax return contains:
- Your personal details;
- A summary of all your income not just Bookkeeper (like bank interest, employment income and rental income);
- Details of allowable expenses you wish to claim against your taxes;
- A tax calculation;
- How much tax you need to pay.
One tax return form covers a tax year. A tax year runs from 6 April to 5 April. So a tax return for 2017/2018 covers earnings during 6 April 2017 to 5 April 2018 and needs to be filed by 31 January 2019.
You’ll need to pay tax due by this date too, as well making a contribution of 50% towards your next years tax bill. This is called a Payment on Account.
You’ll need to make a payment on account if:
- Your tax bill is over £1,000
- You pay less than 80% of the tax they owe through the payroll system
There are proposed changes to the reporting system called Making Tax Digital. This will abolish the current system of reporting once a year and replace it with quarterly reporting and tax payments. This change currently on hold but will be enforced at some point.
How to Fill Out Your Tax Return
To get started with filling your tax return you will need any paperwork which reflects your earnings including:
- Personal Information
- Your Government Gateway Login and Password
- National Insurance Number
- Partners Information if you want to claim Marriage Allowance
- P11d Benefit in Kind Forms
- Dividend, savings and interest certificates
- Rental income and expenses
- Self employment income and expenses
How To Submit Your Self Assessment Tax Return
You need to submit your self assessment tax returns online, except for in really exceptional circumstances.
The form can be found by logging into your Government Gateway Account to complete your self assessment tax return online. You set this up when you registered for self employment. Once logged in you can choose the option to “Complete Your Self Assessment Return”.
Complete the Right Sections
You need to complete the first part of the tax return form with your personal details. This includes a series of questions which help ‘Tailor Your Return’. By doing this the right sections will be provided for you to fill in. For Self Employed Bookkeepers you’ll need to make sure you fill out the Self Employment section to declare your business income.
If you have a full time job you’ll need to enter your earnings and any tax deducted by your employer in the “Employment Section”.
Useful Reading: How to Prepare to File Your Own Tax Return
Your Key Actions to Become a Self Employed Bookkeeper:
- Register as Self Employed
- Open a separate bank account (here’s the quickest way to do that)
- Set up a bookkeeping spreadsheet or Freeagent
- Set aside money for taxes each month at your highest tax rate
- Work out how much you will charge your clients.
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