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December Questions and Answers

Newsletter issue - December 2023

Q: Hi. My wife is full-time employed and has been for all her working life. Therefore, she has had no need to think about Self-Assessment Tax Returns until recently. However, she's begun to take on a small amount of freelance work in addition to her day job in the last year. Are there different rules or options for people in her position in terms of submitting a tax return and paying the tax she owes on that freelance work?

A: There are many people in your wife's shoes who are working for an employer whilst also earning money carrying out another job as a freelancer or sole trader. Whilst anyone in this situation still needs to declare their income and do a tax return, there is another way to go about paying HMRC for those who are both self-employed and employed.

The same applies for those who are employed but have income from rental properties that needs to be declared on a Self-Assessment Tax Return. For those who have a tax liability up to £3,000, you can get it collected through your tax code. That means the amount you owe will get deducted on a monthly basis through your salary, via your employer's PAYE process, rather than having to pay one large lump sum to the tax man.

However, to get that benefit of spreading out the payments you must act quickly. To be eligible, you have to submit your online tax return by 30 December.

Q: I'm self-employed and I earn around £52,000 - £55,000 per year. My record keeping is partly traditional and paper-based. I've been reading recently about the upcoming requirements for digital record keeping. What should I be doing about this now as we move into 2024?

A: You're correct to say that there is a shift underway, driven by HMRC, to require all businesses, and self-employed people to keep digital records. It's called Making Tax Digital. This initiative has been running for some years now, but it's been gradually phased in, step by step. The Government has pushed back the date that someone such as yourself would need to comply. Self-employed individuals (and also landlords) with an income of more than £50,000 will be required from April 2026 to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software.

So, you've got some time yet. But, having said that, there are a number of benefits of moving to be fully digital sooner. By keeping digital records (including invoices, expenses, receipts and other information) you get an up-to-date picture about how your business is doing - how much is coming in and out right now, rather than doing it historically.

In fact, going digital can help unlock the full potential of your business, empowering your decisions, helping your business grow and become more efficient too. Digital financial records can become a catalyst for informed decision-making, propelling your profits and efficiency. So, it's well worth considering making the move to digital before it's compulsory.

Q: I'm preparing to start up a new small business venture in the new year. Initially, it will just be myself, so I'll be a sole trader. How should I go about paying myself?

A: The first thing to say here is that how you take pay from your new venture (and also how you're taxed on it) depends on the business structure. But, as you say, you'll be a sole trader for the foreseeable future.

There is a phrase here that's important. It's called a 'drawing'. When you are a sole trader, it means you're not separated financially from your business. At any time during the year, you can just pay yourself money that comes from the profits your business is making. That's what a 'drawing' is.

It's important to say here that you should be keeping an accurate, up-to-date record of each 'drawing' to ensure you have a precise picture of your profits and the tax you'll need to pay when it comes to completing your Self-Assessment Tax Return. It's also wise to be putting some of your earnings to one side in a separate pot (the best option is a dedicated business bank account) for the purpose of paying your tax.

There is of course also the question of how much you pay yourself. That's entirely your choice, but you do need to strike a balance between what you and your household needs and what your business needs. Plus, you need to be able to cover any money owed through your business activity, debts or obligations to any suppliers you might use.