While this might not be much consolation, HMRC have projected that there will be 32.3 million of us in the UK expected to pay tax in 2020/2021 (based on their Survey of Personal Incomes statistics published by June 2020). However, think about our friends in the US, a summary of the latest IRS data provided by the Tax Foundation in February this year showed that in 2017, 143.3 million taxpayers paid $1.6 trillion in individual income taxes! There’s just no getting away from it – tax is big business.
Essentially, anyone who is self-employed, freelance, director of a limited company, or has multiple sources of income (e.g. from property or investments, second/third jobs), will need to submit an annual self-assessment tax return. And the clock is ticking with the 31st January deadline looming, although the good news is you’ll now get longer to pay. Even if you are an employee paying tax through PAYE, you may still need to submit a tax return if you have any other source of income, such as investments or a rental property.
Income – what income?
It’s possible that some people may have had to take on extra or different work just to make ends meet this year. Or, you may have decided to bite the bullet and start your own YouTube channel, coaching business, or other project which could mean a bit of a wait until the income comes rolling in. If you have just launched your new business and are not yet deriving any income, there is still a benefit to submitting a tax return early. This enables you to declare a loss in your first year which can then be offset against your future profits. Whatever stage you’re at with your career, don’t get caught out by thinking you won’t need to include something in your tax return. Even tips are taxable! Rather than worry about missing anything why not take up our current offer to do your tax return for just £350! A bonus is that this charge is an allowable expense.
However you badge it – beware! HMRC look at a combination of factors to decide whether someone is ‘trading’. These are called ‘Badges of Trade’ and there are 9 listed in their Business Income Manual. This can make it tricky when it comes to tax return time as it can be a fine line between what might be viewed as a hobby ‘casual income’ (photography for example) and self-employment (selling your photos online using Shutterstock).
If you do any of the following, it’s very likely that you’ll be viewed as trading;
- Sell regularly and in an organised manner to make a profit – for example using your graphic design skills on Fiverr or Fivesquids
- Make items with the intention of making a profit – you might have a real talent for photography and start to produce portfolios or headshots for people
- You are selling something that doesn’t give you personal enjoyment – this could include income gained through renting out your stuff. For example, using a site such as Fat Llama which enables people to rent out almost anything.
- Earn commission by selling for other people – if you were producing quality music reviews for unsigned artists but getting paid via Slicethepie, this could fall within this category.
- Are paid for a service that you provide – such as sports coaching, acting, or music lessons
What Self-Employed Tax do I have to pay?
Regardless of your income streams, self-employed tax varies slightly from traditional tax. You may have to pay up to four types of tax. These are:
- Income tax – when you’re self-employed, you pay income tax on your profits, not your total income.
- National Insurance Class 2 – most self-employed people pay Class 2 NICs. This applies if your profits are at least £6,475 during the 2020/21 tax year, or £6,365 in the 2019/20 tax year.
- National Insurance Class 4 – this applies if your profits are £8,632 or more in 2019/20 (£9,500 2020/21)
- VAT – this must be paid by any self-employed worker who earns over a certain amount. At the moment, the amount is £85,000.
Leave the worry to us
Wouldn’t it be a bit of a kick in the teeth to find out your entrepreneurial creativity could land you in hot water with the taxman? With our specialist expertise, we understand the various revenue streams that the sports and media industries have and can ensure you get to keep as much of your hard-earned income as possible. We’ll do all the worrying for you, leaving you valuable time to be even more creative. Contact The Showbiz Accountant for a free initial consultation on 0203 384 2224 or at firstname.lastname@example.org.