Establishing your own business with the ability to control your career path, and even being your own boss is definitely a desirable prospect. All that additional freedom and flexibility may perform extremely well ( even if sometimes it’s not exactly the way you’d expect).
The fact owning your own business typically requires a little more administrative work than being an employee who is paid through Pay-as-you-go, but Self Assessment is just one of the additional aspects.
If you’re an individual contractor, then you could be required to take Self Assessment as a sole trader or director for a restricted company. Depending on how you conduct your business. Confusing, isn’t it? That’s why we’ve put together this article to assist.
Self Assessment for Contractors
As with all businesses, contractors must file tax returns according to the type of business structure they have in place. Additionally, the best structure for your business of contracting is based on the circumstances of your business.
Self Assessment can be described as a form of the tax return in which you provide details about the amount you earn during the tax year to HRMC. HMRC makes use of this information to calculate how much tax you are liable to pay.
You will generally need to make Self Assessment submissions if you contract as a sole trader or in a partnership, or if you’re the director of a limited company.
| Contractors who operate as | Usually need to submit Self Assessment |
| Sole Traders | To report the income, they make from self-employment |
| Partnerships | For the partnership as an entity, as well as separate submissions for their own personal income |
| Limited companies | To report any income they take from the company as a director – such as dividends |
Self Assessment generally works according to a tax year, which begins on April 6 and ends on 5th April in the year after. Be aware that if you require Self Assessment submissions it is necessary to declare your entire income, regardless of the source to ensure that HMRC can determine:
- How much did you earn
- How did you get it
- What allowable expenses can you claim tax relief for?
- Taxes that you’ve been paying (so you don’t have to pay twice)
How and when do contractors pay for a Self Assessment tax bill?
The deadline for paying any tax due after you have submitted Self Assessment is midnight 31st January. Therefore, if you are required to file a report for your tax year that began on the 6th of April in 2021, and concluded on April 5, 2022, the deadline for payment is midnight on January 31, 2023.
It is also possible to make ‘Payments on account If your bill is more than £ 1,000.
HMRC generally assumes they’ll pay you the same amount in the future, and request you to pay an advance toward the next bill. The advance payment will amount to half the amount of your last amount.
Can I lower the monthly charges on my account?
The reason is that usually, a business has a lower profit over the last year. If this is the case it is possible to request to lower the amount you pay on your account to avoid paying tax too much and then later claim it.
It is possible to request this via the account you have created in your Government Gateway account, or talk to your accountant about the request.
Will I be charged interest or penalties for late payment?
It is crucial for you to settle your Self Assessment bill before the deadlines. Unfortunately, you’ll be penalized for late payment in the event that you fail to pay it in time. The interest will become due until you have paid the entire amount that is still due.
If you believe you’ll face problems getting deadlines for your Self Assessment due dates for tax, the very last option is to try to avoid the issue. Call HMRC directly or speak with your accountant regarding what you should do.
I’ve made an error on the Self Assessment tax return. How can I fix it?
Yes, you are able to amend taxes within 12 months after the deadline for filing. Keep in mind that any modifications you make may cause you to pay additional taxes or pay interest.
If you file your tax return and there are obvious errors or issues, HMRC can correct it within nine months after the date of filing.
Does HMRC ever enquire into a tax return?
Sometimes, yes. HMRC could initiate an inquiry into Your Self Assessment within 12 months after it has been completed. The IRS will notify you by letter if this occurs.
There are no questions that can be asked by HMRC regarding your tax return until they have launched an inquiry. Don’t be concerned when this happens, however, it’s not necessarily a sign there’s an error or that there are difficulties. Most of the time, HMRC will just want to confirm the accuracy of your tax calculation, and sometimes it could happen randomly.
What information should I record?
You’ll have to keep accurate financial documents in order to finish Your Self Assessment accurately. Due to the forthcoming making tax digital for Self Assessment of Income Tax rules, you should think about adopting a digital approach to your bookkeeping, if you’re not already doing it.
You may also require additional documents or information to ensure you have completed all the items in your self Assessment checklist.
What do you think of CIS tax returns? How will they impact Self Assessment?
Under the Construction Industry Scheme (CIS) contractors in the building trade keep back a percentage of what a subcontractor earns and then pay the deduction on to HMRC. This is similar to the way employers pay employees.
The contractor will have to pay the administration is a little more complicated, but for sub-contractors, it can have a greater impact. This is due to the method by which CIS deductions are calculated. There are two elements to this equation: The CIS tax rate and the tax-free personal allowance.
What is the CIS taxes?
Contractors are able to deduct CIS tax based of whether or not the subcontractor is registered with the scheme.
- If you’re CIS registered, contractors can deduct 20% CIS tax prior to paying you.
- If you’re the only one, not CIS certified, the CIS will subtract 30 percent. If you file a Self Assessment, you’ll be eligible to claim any overpayments that may occur because of this.
What is Tax-free Personal Allowance, which is tax-free, mean for subcontractors?
Tax-free Personal Allowance will be the maximum amount that you earn before you begin paying taxes. For a reason why this is especially relevant for sub-contractors, let’s take a look at the process for regular employees.
- They typically take the allowance based on the amount they anticipate you to make in the course of a year.
- This means they’ll take this allowance into consideration when determining what percentage of your earnings each time they make a payment to you.
- When you get to the final day of the year you’ve usually paid the correct quantity of taxes (or nearly).
If you’re a sub-contractor
- The contractor doesn’t make allowances when determining the amount of CIS tax they will deduct prior to paying you.
- In the end, some sub-contractors will reach the end of their tax year with an enormous amount of tax however they do not use personal allowances.
- It means they’ve paid more taxes than they should have been, and are eligible for tax credits after they have submitted the Self Assessment.
If you’re a subcontractor. It’s worthwhile to submit your return as soon as you can in order to be able to claim any tax rebates earlier!
Are contractors able to claim relief from tax for Self Assessment?
In the simplest terms, it’s true. Every business is able to (and ought to!) include any expenses that are allowable on its tax return as well as claim relief from tax for the amount it pays.
Understanding the costs you can claim is an aspect of Self Assessment that many struggles with. It’s tempting to overstate your claim in order to be sure you’re on the “safe side” but in doing so, you’re making yourself look really short.
That is, you’ll be paying more tax than you have to. This is something our team is happy to help you with.
For example, a construction contractor in the construction sector could get tax relief for allowable expenses like:
- Materials to work with
- Essential tools and equipment
- General expenses of managing the business, like stationery and marketing
- Costs of travel related to work
- Charges for accountancy
What do you think about IR35 What is IR35? How does it impact Self-Assessment?
If you’re a contractor or are contemplating getting one in the future, then you’ve likely encountered IR35. It’s an ambiguous issue but the IR35 concept is to eliminate the tax loophole for contractors operating by operating their own companies but are actually an employee by name.
The obligation to determine whether a contract is in line with IR35 rules is contingent upon the person who is the client but , if IR35 rules are in place:
- The client will subtract taxes on income along with National Insurance from your invoice before they pay you. Exactly as they would have if you were actually an employee. The client is responsible to pay this to HMRC to pay for yours.
The money you receive through the company is “after tax, meaning that it’s already tax-free for that specific portion. It’s crucial to make this evident in your Self Assessment, in the event that you don’t, you could be required to pay tax on it yet again!
Taxes can be a challenge, particularly in the case of not being an employee for long. Find out the details about our accounting online solutions for contractors. You can also call 020 3355-4047 for an instant online estimate.
