London Screenwriters' Festival

Don’t Tax Yourself

Posted on: September 26th, 2010 by Lucy V Hay 6 Comments

I’ve been asked about tax this week by three different people, so thought I would address this issue on the blog.

When people are looking to make the jump from employment to self employment, they often say they’re scared of the paperwork involved – and the notion of the taxman and the tax return can be very daunting. After all, we’ve all heard the horror stories – like your Mum’s mate’s son who didn’t add it all up properly and got whacked with a humungous tax bill, or the recent furore in the news about HMRC’s OWN mistakes.

But in reality, doing all the paperwork for your accounts couldn’t actually be easier. And if I can do it, anyone can:

1) First, add up everything you EARNED in the past year. Most of my writing, reading and editing fees come in via Paypal, so at the end of my tax year all I do is download the figures coming IN, print them off and add them up. However you must also include cheques and BACs (bank transfers), so I tend to keep a record of these in a little book throughout the year… So at the end of the year, I add them up – and add them to the Paypal total.

2) Then, add up everything SPENT in the past year on your job. You know how self employed people always keep receipts? That’s for NOW. Obvious “allowed” expenditure includes things like mobile credit, rail fares, computer repairs, coffee and lunches while on the job, membership of sites like Twelve Point, plus tickets to training courses and festivals like London Screenwriters Festival. However, I have also put through iTunes (I need them to concentrate!), painkillers (reading off a screen gives me a headache!) and cinema tickets/DVD rental (research!). I always wait until the last minute to add up my DELUGE of receipts, but I’m sure you’re not as daft as that.

3) Now, take away your EXPENDITURE TOTAL from your EARNINGS TOTAL. What you’re left with is, is what you earned. You put all three numbers in the relevant box on your tax return.

4) Now, fill in your tax return. You usually get one via the post, or you can fill one in online. But that’s all there is to it. Simples!

QUESTIONS

1) What can I earn before I need to pay tax?

Everyone has a “personal allowance” of £6,475. This means you can earn £6,475 before you need to pay any tax – so if you earn less than this through self employment, as I understand it, you don’t need to fill in a tax return… UPDATE: BUT apparently this may not always be true for everyone, so the advice here is: ALWAYS CHECK YOUR PERSONAL POSITION TAX-WISE WITH AN ACCOUNTANT. A lot of small accountants offer one-off advice services for freelancers, sole traders and companies, some will even advise you for free in the hope you’ll use their other services in the future. Check out Yell.com or ask around – I think “word of mouth” is invaluable in finding a good accountant.

2) I have a job and do some self employed work on the side (or vice versa) – do I need to fill in a tax return?

Depends. If that job AND self employment earn less than your personal allowance, then maybe not. If one does, then yes – fill in a tax return and include BOTH on there. I do EFL teaching and tutor throughout the year as and when I need to (ie. I’m broke!) and do this – all you need to do for your employment figure is put your earnings from your P60 in the relevant box on the tax return.

3) Do I have register my company?

Apparently you have to earn a certain amount before becoming a limited company. As most of us writers, readers, etc are just individuals working from home (known as “sole traders“), then there is a strong chance you won’t have to do this. Setting up as limited company.

4) What about VAT?

Again, to be VAT registered, you have to earn a certain amount – at the moment, a whacking £70K! (I wish). Check it out.

5) What about things like the state pension, maternity pay etc – if I’m self employed, I won’t get these, will I?

State pensions depend on the class of your national insurance contributions (see the link below) and how much you earn – if your earnings are consistently VERY small, you may need to make other arrangements for your retirement. For the ladies amongst us, there is now what is known as Maternity Allowance, which covers self employed women. It’s a very small amount, but it’s better than nothing – believe me: last time I gave birth I was back reading scripts within two weeks! (Argh!)

6) I’m still freaked out about all of this. Can’t I get an accountant to do it all for me?

Boutique accountants often offer a service for freelancers like us where they will check over your receipts, calculations and then fill in the tax return FOR you and submit it to HMRC for you as well. This can cost between £75-300 pounds, generally. But be warned they usually want you to add up your expenditure/earnings yourself, they only check them.

7) I’ve heard HMRC are suspicious of freelancers/self employed. Is this true?

Not in my experience – or anyone’s I know personally. My mother was a sole trader like me and I never once saw her investigated in the thirty odd years she supported our family in this way. This could change the more you earn, however – so perhaps if you were a limited company you would be under more scrutiny.

LINKS

Income Tax Thresholds

9 Fun Facts About Tax (Walletpop)

Facts About Tax (Quiz)

Self Employment Tax (inc National Insurance)

All about Self Employment (Direct Gov)

Got What It Takes To Be Your Own Boss?

6 Responses

  1. Dom Carver says:

    Hasn’t the earning threshold just gone up by a thousand?

  2. Lucy says:

    Mighta done – that figure’s only what’s available on the website at present, always worth double checking.

  3. Carla says:

    this is really helpful – thanks

  4. Carla says:

    I wanted to ask if you win a scriptwriting competition with a cash prize – does that amount also get taxed or is it only commissioned work?

  5. Lucy says:

    You’re welcome Carla and in answer to your Q, I have no idea because I have never won a comp! But I think it probably depends on the contest – apparently some game shows are tax free if you win a large cash prize, so I’d bet it would be the same here. You’d have to ask the individual contest if they’d arranged tax free status – and if not, yes you would be taxed on those winnings, I’d guess.

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