The 6th of April marks a new tax year, so what better time than now to delve into a very important but much maligned subject that affects artist all over the UK, self employed finance.
We linked up with Bristol Based accountant, Ryan from Magic Bean Counters to ask him 10 questions you wanted answers to about self employed finance as an artist.
1.What documents do I need to keep and how long for?
For the self-employed you must keep your records for 5 years following the 31st January that they were due.
So for your 2019/2020 tax return (which was due 31st January 2021) the self-employed documentation would need to be kept until 31st January 2026. There are exceptions to this though – if you file late or if you are currently being investigated then this can be extended; if you purchase or improve an asset or enter into other multi-year financial arrangements you’ll need to keep documentation up until the item is disposed of or arrangement ends, and then follow the 5 year rule for those documents after that.
The documents you should keep should be sufficient evidence to backup each transaction.
Bank statements are a type of evidence that is accepted but you really should retain all invoices and receipts of purchases. Digital copies are acceptable.
2.How much money does a creative need to earn before they have to start paying tax on it?
In short – currently £6,240 in profit, but it could be less if you have income from other sources.
is the headline amount that is most often referred to (currently £12,500), but there are two important thresholds before this that would result in amounts due to HMRC – the Class 2 and Class 4 National Insurance thresholds.
Class 2 NI gives you qualifying years towards your state pension, it is levied at a flat weekly rate for anyone who earns over the Lower Earnings Limited (£6,240) if you earn less than this you can opt to pay this voluntarily to get a qualifying year. Class 4 NI is taxed at 9% for any amount you earn over the Lower Profits Limit (currently £9,500).
3.Can I claim the cost of coffee from a work meeting in a cafe?
The phrase to test any expense against is ‘wholly and exclusively for business purposes’, and the problem with food & drink in general is that it cannot be wholly and exclusively for business purposes because it is considered to have a dual purpose – your personal sustenance. There are exceptions to this: food while travelling, entertainment of employees, meals in general if offered to all staff – all of these have their own set of conditions though and you should be clear on them before claiming.
4.What can I claim for my car, and how?
you keep a log of your business miles and claim up to 45p per mile for the first 10,000 miles in a tax year, and 25p per mile after that.
Percentage of all costs
you add up all your motor costs (including insurance, repairs, fuel, tax) and claim a % of this relevant to the split between personal and business use of the vehicle.
Once you start using one of these methods you cannot switch while using the same vehicle, if you change vehicles you can change methods. If using #2 then you can also claim capital allowances against the purchase of the vehicle – but again this is restricted by the personal/business use split. You can assess your split of usage by tracking business miles and also the starting/ending mileometer readings each tax year.
5.What do I need to do if I go over the VAT threshold unexpectedly?
An important thing to note with VAT thresholds is that they are on a rolling basis, it is for any 12 month period not just your own accounting year. If you do go over within a 12-month period then you have 30 days from the end of the month in which you go over to register, your actual registration would start from the first day of the second month after you went over the threshold. For example: your turnover Jan 20 – Dec 20 is £86,000, you must register by 30/1/21, your registration would start from 1/2/21.
Another rule covers the exceptional circumstance where you expect to have sales in excess of the £85,000 threshold entirely within the next 30 days, you then have until the end of that period to register and must backdate the registration to the start of the period.
It is possible to apply to HMRC to be excepted from registration. This should be undertaken within 30 days of exceeding the threshold, but HMRC will consider applications after this. The exception is for situations where the breach of the threshold is temporary, proof of why this is temporary would need to be submitted.
6.When is my tax due, can I pay it monthly?
Self-assessment taxes are officially due by the 31st January each year for the preceding tax year and interest is charged against any payments made after this. You do however have 30 days from this date to settle your tax bill before you are charged any penalties. You can certainly pay monthly ahead of time without issue using the same payment details as you would when making annual tax payments, but if you wish to pay monthly after the due date you will need to contact HMRC’s Payment Helpline to try to arrange a payment plan. You will still be charged interest but could avoid a penalty.
Payment on account
If the core elements of your tax bill (Income Taxes + Class 4 NI) add up to over £1,000 you may have been asked to make payments on account (PoAs), these take place in January and July. This is very punishing the first year it happens as you effectively pay double tax – your previous year tax year and the current one. PoAs do attract interest if paid late but not penalties, you can also request to reduce your PoAs if you believe your income has reduced.
At the time of writing HMRC are offering payment plans as standard for 2019/2020 self-assessment bills under £30,000.
7.Can you explain how the tax rates work?
That is no mean feat … the following is an overview of the most relevant for the self-employed:
this is levied against most types of personal income, with all elements added together and then compared to the tax bands. Each income element may have its own allowances, reliefs, and rates. Once you’ve applied reliefs, deducted allowances, you then see where that slice of income sits within the tax bands and apply the appropriate tax rate. E.g. if you had employment income of £13,000 that would take up all of your personal allowance and put any other income in to the basic rate band; if you also had £2,000 of self-employed income, deducted the £1,000 traders allowance you are left with £1,000 of taxable income within the basic rate band – this would attract income tax at 20%.
This is levied against earned income, and unlike Income Tax you can receive multiple allowances. Each employment you hold will have its own NI allowance, and your self-employed income will also have its own. The thresholds for being charged Class 1 (employed) and Class 4 (self-employed) is currently £9,500. There is an upper threshold above which NI charges drop to 2%, below this the charge is 12% for the employed and 9% for the self-employed. There is another type of NI that the self-employed pay, this is class 2 NI which is charged at a flat rate when your profits are over £6,475.
8.You can earn £1000 tax free from self employment, is this on top of your employed tax free allowance?
Yes! This is a relatively new allowance called the Trading Allowance, there is a similar one called the Property Allowance that can be used against property income. This is a flat rate claim that can be made against your income, if this claim is used you cannot claim expense. If this relief would cover all of your income you do not need to file a tax return to make use of it, but you do still need to keep records of your income. There are conditions for its use, for instance the income cannot come from a company or partnership that you or someone you are connected to owns or controls, and it cannot come from your employer.
9.Does brexit affect the way I pay self employed tax?
In general there should be no change, but there can be complex issues when it comes to tax-residency and working abroad and so if these issues effect you then it may be worthwhile seeking advice for your situation.
10.How much does it cost to have an accountant?
This can vary a lot between accountants, and depending on the size of your business, business setup & if you do your own bookkeeping (and how well!). For a typical sole-trader with relatively organised paperwork and no complex setup or claims required you are likely looking at between £150 and £240. It is becoming more popular for accountants to offer fixed monthly prices, possibly including software, which may mean higher fees. Having an accountant can add reassurance and provide you with helpful guidance but you should be aware that it is still you signing off your tax return and accepting responsibility for the figures.
Thank you Ryan,We hope that this article has helped you to demystify self employed finance as an artist. We also have a great free resource in the members area of our website that has more information on how to keep track of the pennies, check it out!
DISCLAIMER: The responses here are for guidance purposes only. It is not a substitute for obtaining specific advice for your individual situation. Tax rates and thresholds are for the 2020/2021 tax year, these change annually as does tax legislation in general. Whilst every care has been taken with the preparation of these details we do not accept any responsibility for any loss occasioned by reliance on the contents.