The biggest mistake people make when self-employed

It doesn’t matter who you are – a sports personality, an actor, a film producer, a freelancer – if you’re self employed, the biggest mistake you can make is getting your tax wrong.

You might be good at doing the work side of things, but that doesn’t necessarily mean that you are good at running your business and organising your finances. There’s no doubt that setting aside the right amount of money to meet the corporation tax, income tax and value added tax bills is a regular bug bear. But not setting aside the correct monies for tax can spell the end of your career, no matter how successful you are.

The main problem is that not only is the tax system very complicated – there are around 21 taxes levied in the UK -, it is also biased towards employed people. Why do I say that? Because circa 34 million people in the UK are employed and pay their taxes via their weekly, (sometimes fortnightly) or monthly wage slip. It therefore makes ‘sense’ to set up a system that works for this majority. Yet, there are still some 4 million people who are self employed. 4 million people, like you, and me for whom the system is far less beneficial. 

So, if you are self-employed, what should you do about tax? Here’s a quick summary of what you need to know and how best way to prepare for the payments. Spoiler alert – it is all about planning….

Corporation Tax

It’s payable nine months and one day at the end of your accounting period.

There are different tax rates, with the highest one currently being 25%.

TIP 1: Get into the habit of setting aside 25% of your income or revenue each month or on each payment you receive to pay this bill. 

Income Tax

Payable twice a year, in January and July.

Currently, there are different tax rates with the highest one being 39.35% if you pay dividend tax or if you are paying additional higher rate tax, it’s 45%.

TIP 2: Get into the habit of setting aside 40% – 45% of your income or revenue each month or on each payment you receive to pay this bill.

Value Added Tax

Payable quarterly.

The current tax rate is 20%.

TIP 3: Get into the habit of setting aside 20% of each invoice you receive to pay this bill.

There it is. A lot of people think that when it comes to tax, there should be some kind of fancy way of doing things or a way around doing the obvious. There isn’t. The best thing you can do is put the right amount of money aside each month or with each invoice and save up for those bills. It’s simple, but it’s effective.

And if you’re wondering where to save, we’d always recommend an instant access account. If you have a mortgage, consider using an offset mortgage. This type of mortgage links a savings account to the mortgage. Any savings are used to offset the mortgage amount so you are only charged interest on the difference. 

The key thing therefore is to have a tax plan as per the tips above and to take the right tax advice. You really don’t want to be falling foul of the tax man.