Following on from A Creative’s Guide to Registering as Self-Employed, here is some useful info about what to do about tax when you’re registered as self-employed – essential knowledge for any commissioning creative!
What you earn as a sole trader is taxed just like with every other job – except that since only you are keeping track of what you’re earning, you are responsible of letting HMRC know what you ought to be taxed upon each year. (In other jobs where you are an employee, tax is usually automatically calculated and deducted, making things a little easier for you.)
Your income includes both what you earn as employed and as self employed added together.
- Everyone has a Personal Allowance, which is usually £11.500. This means if your total income is below £11’500, you don’t have to pay any tax on it.
- If you earn more than that, you will be taxed 20% on anything you earn over £11’500 up to 45k a year. E.g. if you earn 20k a year, you will be taxed 20% of 8’500 (20’000-11’500).
- Everything that you earn over 45k will be taxed by 40%, and so on.
See this link for more information.
The self-assessment is just a form where you write down everything you’ve earned so that the tax you owe can be calculated.
Because you have registered as self-employed, you must fill in a Self Assessment form and send it to HM Revenue and Customs after the end of each tax year (usually 6th April). This is where you write down your income from the last year so that HMRC can calculate the tax you owe. You can do this online or on paper.
Profits vs Expenses – and how this relates to tax
Profits are the money you earn from what you’re selling, minus your expenses and running costs. If you’re an artist, expenses can include physical materials, software, renting studio space including heating, water, and electricity bills, any advertising costs, and travel.
You are only taxable on your profits, excluding expenses, so it’s very important to keep record of them. This will enable you to work out what you can deduct from your tax refund at the end of each tax year. You don’t want to be paying extra tax unnecessarily!
For example let’s say in one year on top of your day-job income, you have earned £1000 from selling music tracks. You have paid £300 towards material costs and a studio space during that year, making your total profit £700. So you would only pay tax for the remaining £700 (which would be £140 at 20% tax rate).
Calculating expenses when working from home
If you work from home, you can claim a proportion of your home costs back as expenses – including your mortgage or rent, your bills, and your council tax. You calculate this by dividing the total running costs of your home by the number of rooms that you use for working, or by your working hours. This results in the costs of your expenses. Gov.uk gives a good example of this:
You have 4 rooms in your home, one of which you use as an office for remote work.
Your electricity bill for the year is £400. Assuming all the rooms in your home use equal amounts of electricity, you can claim £100 as allowable expenses (£400 divided by 4).
If you worked only one day a week from home, you could claim £14.29 as allowable expenses (£100 divided by 7).
However if this method is too complicated, you can use ‘Simplified Expenses’ which works it out for you based on how many hours you work from home and your vehicle usage instead.
National Insurance is something extra that everyone pays from the age of 16 to pension age if you’re earning over £157 a week as an employee, or £6’025 a year as self-employed. It goes towards various state benefits and your State Pension (which you’re going to want when you’re older!)
They come in types or classes which depends on how much you earn.
As a sole trader, you usually pay 2 types of National Insurance, which are:
• Class 2 if your profits are £6,025 or more a year (which means you’re to pay £2.85 a week)
• Class 4 if your profits are £8,164 or more a year (which means you’re to pay 9% on profits up to £45’000)
You can pay these off in your Self Assessment Form alongside your tax refunds.
And that’s that!
I hope this advice has been useful to you, and you’re a little more clued up with what to do when the tax man comes knocking! Don’t forget to check out www.gov.uk/browse/tax if you’re stuck, or ask for financial advice from advisors or family members who will have been there, done that all before.
Written by Karis Lambert