Starting out as a freelancer can be a daunting experience. The comforting blanket of full-time employment and PAYE schemes is whipped away, and suddenly you’re left to your own devices, to figure out your own tax and National Insurance Contributions. Understanding how to calculate and report these payments is a key part of becoming a successful freelancer, and tax returns, in their various guises, are how you do it.
Although there are many different forms of tax return, they all have the same purpose. They exist so you can report certain earnings to HMRC, and show how you’ve calculated the amount of tax you plan to pay.
For a freelancer – depending on whether you’re a sole trader or a limited company – there are a few different tax returns you should be aware of.
This is the main event; the big daddy. The celestial tax body around which all freelancers orbit. The yearly Self Assessment is required whether you’re sole trading or the director of your own limited company. Your Self Assessment is your chance to tell HMRC about your income in the last year, so they can work out how much tax you owe.
These days the vast majority of people file their Self Assessment online, and the deadline is January 31st after the tax year you are reporting for, so your Self Assessment for the tax year 2012/13 will be due on January 31st 2014.
For the small percentage of people who still file on paper, the deadline in October 31st.
If you are VAT Registered you must file VAT Returns, usually quarterly. A popular misconception is that only limited companies may register for VAT – actually sole traders can too, if and when it becomes advantageous or necessary. VAT is charged on most goods and services within the UK (and some brought in from abroad), and your VAT Return is your chance to tell HMRC about VAT-able goods or services you’ve bought or sold. Depending on what you’ve been up to in your last VAT period, you may owe HMRC tax, or they may owe you a refund.
VAT Returns are all filed online, and the deadlines will vary from business to business.
This one is just for the limited company freelancers out there. At the end of every company year, you must calculate how much profit your business made (revenue minus expenses, broadly speaking), and pay Corporation Tax on it. For all but the most successful of freelancers the Small Profits Rate of Corporation Tax will apply (20% at the time of writing). For those earning over £300,000 per year higher rates will apply.
A Corporation Tax Return (or CT600 to give it its proper name) must be filed (and any due tax paid) nine months and one day after the end of your company year.
Another common misconception is that an Annual Return – a form all limited companies must submit to Companies House once per year – is a form of tax return. It actually isn’t, and has nothing to do with tax! An Annual Return contains company information such as names of Directors and the registered address of the company. You can find more information in our big freelancers accounting glossary.
Photo by Winston-Salem Tax