Optimising your income: tax tips for freelancers

The number of freelancers is on the rise.

LFS data suggests there are now 1.91 million freelancers in the UK, some 6% of all UK workers – up from 1.4 million in 2008. Stepping away from the security of a regular job brings many freedoms, but presents challenges too. One of the key responsibilities is filing your tax return – more complex than it first appears, the rules can be labyrinthine for the uninitiated. However, get it right and there are a surprising number of ways to reduce your tax bill and ensure you meet HMRC’s requirements.

‘The moment you go freelance, consider what you are introducing to that business,’ says Ian Hunt, Principal, East Devon Law and a Chartered Legal Executive specialising in tax planning. ‘Are you using your existing laptop, printer, car, mobile phone? All of these are capital assets and you can claim a proportion of their costs as business expenses.’ Assess how much time you’re using the asset for the business, and how much is personal. ‘Then you use a reasonable percentage as a claim.’

Secondly, says Hunt, ‘where are you going to work from? If you’re using your spare bedroom or the loft conversion, that becomes your office – and this means a proportion of it also becomes claimable.’ Work out how much of the building your new office consists of. ‘Then, you can effectively start charging your business rent or you can look at how much electricity you use, how much you use the kitchen for tea and coffee, and work out a reasonable proportion of your bills.

Do’s and don’ts

Henry Cooper, Owner of BirchCooper Accounting Services and Past President of AAT, takes up the story. ‘If you have a dedicated office at home be aware that when you sell, it could in theory be liable for Capital Gains Tax as a business asset rather than part of your home; take advice on this. But if there is an element of mixed use it is not necessarily a major issue.’ A useful tip for freelancers is that if you want to reduce the calculations you need to make for allowances, ‘there are simplified expenses you can use.’ This involves making a reasonable estimate of usage and the HMRC calculator tells you what you can claim. ‘These are not always available for PLCs,’ says Cooper, so they are a good advantage of being a freelancer.

In your first year as a freelancer you’re likely to earn less than your long-term expectations, and the complexity of learning the tax ropes can be off-putting; particularly for freelancers who may be excellent at what they do but not so great at the numbers. Getting an accountant may seem like a cost to avoid, but in reality a good accountant will almost certainly save you more on your tax returns than it will cost you in fees. And, an accountant’s fee is in itself a deductible business expense. ‘But get a good one,’ says Hunt. ‘Make sure they are experienced with freelancers and personal taxes.’

Adele Atkinson, Hunt’s Practice Manager at East Devon Law, adds that ‘in the first year, you can feel really swamped – so get as much help as you can. If you’re going to buy software, check which type your accountant uses before you invest. You can always cancel it further down the line if you find you don’t need it, but to begin with, when you’re fighting everything else, it really is useful.’ Look around for free help too, Atkinson suggests. ‘Sage do very good free webinars and HMRC do as well – it’s worth signing up to the email alerts.’

Making life easier for yourself

Some freelancers may be concerned about the changes to the way HMRC is about to collect data, with the annual tax return being replaced by quarterly filing and the requirement to use suitable software. For freelancers who are used to keeping simple spreadsheets, is this going to cause a problem? ‘Don’t go for complex software if you don’t need it,’ says Cooper; ‘take advantage of it though if it will help speed up the business.’ For example, if you have lots of low-value receipts and invoices passing through your hands, automated accounting can be a real time-saver and worth investing in. ‘As far as the HMRC changes are concerned,’ Cooper says, ‘there’s still plenty that we don’t know. It’s going to be in place from 2018, and AAT has been in consultation with HMRC to find out the implications for all businesses, large and small.’ The main advice for freelancers is ‘wait and see’ – don’t go out and buy software now, because it is probable that free software will be provided by HMRC nearer the time.

One concession that Cooper draws attention to is the recent announcement that if your turnover is less than £10,000, you can be exempt from quarterly reporting. ‘This seems anomalous because you get taxed on your profits; you could have a much higher turnover and not be making much profit.’ As everyone has an £11,000 tax-free allowance anyway, Cooper believes it’s strange that the new concession was not aligned to this. ‘The new rules are still a work in progress though,’ he emphasises, ‘so for now it’s a case of “watch this space”.

Finally, be careful if you are employing people. ‘The definition of “freelancer” is quite important to HMRC,’ says Hunt. ‘If another freelancer works for you and comes to your office regularly and doesn’t tend to work for anyone else – you need to be alert to whether they are an employee, with all the implications and responsibilities that brings.’

Top tips for freelancers

  • Be organised. ‘Keep it as simple as you can,’ says Henry Cooper, ‘and then it’s easier to be organised.’ Have monthly envelopes for your receipts, for example; ‘or staple weekly receipts to a page,’ suggests Ian Hunt. Whatever works best for you is key; make things clear and easy for you or your accountant to look at when it comes to preparing accounts, and keep things in date order.
  • Be careful when claiming for your car. If the vehicle is exclusively for business use, you can claim everything on it – insurance, tax, petrol, repairs and maintenance. But if there is an element of mixed use, be cautious. ‘It can be hard to prove,’ says Adele Atkinson. ‘It’s much easier if you have a second vehicle and you strictly delineate their usage. You can then keep separate receipts for personal usage.’ If in doubt, it can be better to use mileage claims rather than claiming for the whole vehicle – again, an accountant will help you get this right.
  • Keep an eye on the VAT threshold. ‘If you head towards £83,000 turnover you will need to be VAT registered and file quarterly,’ says Hunt. ‘Bear in mind that VAT is rolling – so if you start the year thinking you’ll be below the threshold but do better than expected, you’ll have needed to be asking for VAT receipts from the beginning – or you won’t be able to claim it.’
  • Know your allowances. ‘If it’s legitimate and used exclusively for the business, then claim it,’ says Cooper. Your accountant will tell you – and the savings you make will offset their fees.

Freelancer stats: Quoted in Exploring the UK Freelance Workforce, IPSE, April 2016.

Mark Blayney Stuart is a business writer and speaker and Former Head of Research at the Chartered Institute of Marketing.

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