Six tax tips for designers who are starting their own business
Although it may not be the most exciting part of being a freelance designer or self-employed, tax is an essential part of the job.
The UK government has been planning a digital reform for the tax return process since 2015 and back in July, it announced the timeline for the next phase of roll out.
For those just starting out in the self-employed, changes to the tax system can seem daunting. According to Mike Parkes, a tax expert and technical director at GoSimpleTax digital tax software, designers don’t need to be worried. Here’s his advice for designers.
1. Don’t listen to tax “urban myths”
Parkes says, “The man down at the pub may sound like he understands what he’s talking on, but don’t listen to tax hearsay.” Many tax myths exist that distort information, and it is possible for newly self-employed people to become confused.
Parkes claims that a common myth is that self-employed people don’t have to pay tax the first two years. While it sounds appealing and convincing, it is not true. There could be a gap between your first tax payment and the time you registered as self-employed. However, Parkes states that you should “think about tax payments from day one”.
Another common myth is that you must pay taxes as soon as your tax return is filed. He says this myth makes people feel pressured to file late and delay their tax returns. Although it is best to file your tax returns in the middle of the calendar year, you won’t actually need to pay them until January.
For all urban myths, Parkes recommends checking out the most up to date information on the HMRC website.
2. Do try to do things early
Parkes suggests that you aim to complete tax returns in plenty of time. HMRC statistics show that around 45% of tax return filers file tax returns within 30 days. This is a huge number of people who don’t keep track of their affairs.
Parkes states that leaving tax returns until the last minute can lead to stress in the tax system. It is important to allow yourself enough time to review your earnings and incomes. Making Tax Digital (MTD), which will allow quarterly filing, will help to make this easier.
Parkes suggests that designers notify HMRC as soon as they change to self-employment, even before considering tax return filings.
“Ask yourself at the beginning of this process if your true self-employment is: Are you in control? Can you issue invoices? He asks, “Can you decline work?” Once you are able to answer those questions, let HMRC be aware – although you may not have to file a tax return in 18 months, you will still need to enter the system.
3. Don’t ignore your bookkeeping
Parkes says, “Start recording your incomes and expenses as soon as you begin to work.” It doesn’t have to be fancy.
MTD is coming so digitizing bookkeeping is an obvious priority. But if you find that writing down things helps you get into the habit of doing it, then this is the place to start. It is better to spend a few minutes each week on this task than to rush through it at the last minute.
Parkes says that good bookkeeping can help you keep track of your new venture and make sense tax-wise. It can be difficult to see how your business is doing if you only pay attention to taxes once or twice per year.
“Is your business doing well?” He says that if you see that your financial records are not sufficient to support the lifestyle that you desire, you can quickly change your approach or walk away.
4. Do question what you need from a tax software
The upcoming shift to digital taxation will be a major focus on tax software. These programs can log your income, expenses, and send HMRC income updates. Parkes explained that there are many options for self-employed people. It is important to understand what you need in a software program.
The first place to start will HMRC’s recognised list of tax software – as the name suggests, these have been recognised by government and meet the requirements for MTD. Parkes suggests that designers ask themselves what the software does for them and their company.
He says that most designers want software that is specifically designed for non-accuntants and that provides a basic service. Some software is designed for accountants, and you may not be familiar with the language. Shop around to find the right one for you.
Parkes suggests that you test out the software to ensure you are satisfied with it. If you don’t feel the software is right for you, and you are happy with your digital system (e.g. a spreadsheet), you can choose to skip tax software.
5. Don’t forget to make a provision for your tax bill
Parkes says that one of the most frightening aspects of paying taxes is not having enough money to pay your bill on time.
This is why it’s a good idea to save money on each payment. He says that 20% is the current tax rate, but any amount you can separate from your income is a good place to start.
Parkes states that while you might not be able afford a monthly amount, it is possible to do so. Parkes also says that MTD could help make this easier in the future. Self-employed taxpayers will have a better understanding of their tax liabilities, Parkes says. This will allow them to make a more accurate estimate of what they owe at the end.
6. Do keep an eye out for expenses
Parkes says that there are not many tax savings tips you can use these days to lower your tax bill. Parkes says that paying more attention to your expenses might help lower it a bit.
Park states that pre-trading expenses are one of the most valuable expenses for self-employed designers. Park says that equipment purchased by self-employed workers before they start their work can be claimed on their first tax return, just as if it was bought on the first day. This includes computers and desks.
Parkes says, “Take a look at the items you are using and add them to your tax return as pre-trading expenses.” It may not seem like much, but it could be significant.
He says that even if you aren’t sure if something is deductible as a business expense it’s still worth noting. It could prove costly in the long-term to not do so.
Parkes advises that you record everything, even if it’s not clear – you can always ask someone later. You won’t be able to ask the question if you don’t write it down.
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