Many people want to give going it alone a shot - but one thing that often strikes trepidation into the hearts of entrepreneurs everywhere is tax. But there's no need to be intimidated. We spoke to a new freelancer about the lessons learned during the first tax year of their freelancing experience.
I’m rapidly approaching the end of my first tax year as a new freelancer - and it’s been a learning curve! As I come to hand in my stack of receipts, spreadsheets, and bank statements, here are the things that I’ve learned throughout my first year.
Do your bookkeeping weekly
This one is boring, but vital. Set aside a couple of hours each week just to make sure you’re on track with your expenses and recording your income correctly. This will ensure things don’t get lost, and prevent a mad panic when it comes to hand in your tax return. Little and often is less overwhelming than looking at summarising a whole year in income and expenditure at the last minute.
I didn’t know much about tax before I started working for myself, and educating myself has been really important. For example, I now know so much more about claiming for allowable expenses and what expenses are actually allowable. What you can claim for will depend on your industry, so be sure to look into it. For example, if you work from home you can claim for a portion of your bills and rent or mortgage - something I had no idea about before I started (yup, I’m clueless!) But things I had assumed I could claim for, such as taking a prospective client for a coffee, can’t always be claimed for.
Double check everything
When you’re doing your tax, you really don’t want to make a costly mistake. Go slow, and double check everything that you’ve been paid or paid out in the last year, with the help of bank statements and receipts. Not only will you have peace of mind that your tax return is as organised and accurate as possible, you might discover expenses you missed or even invoices that never got paid.
Get an accountant - and communicate with them
Getting an accountant has been the best thing I’ve done, tax-wise. I do my own book-keeping, but then I have the peace of mind of knowing that someone can take my spreadsheets and expenses and receipts and help me make tax return magic happen once a year. It’s making me feel a lot less anxious about the process, and is definitely worth the money (which you can claim as an expense - see point 2!). My accountant is also great at answering queries or talking me through things when I’m confused, which you will be at first.
Try and keep things simple
Something I didn’t do this year but which I will do from now on is try my best to keep things simple. You will always have to provide receipts - however, as well as receipts I’m also having to track down stray expenses from two bank accounts and a Paypal account. I can now see the appeal of a business account, where all transactions are related to your business: simplicity helps!
You have to pay your tax bill, after all, so when money comes in make sure to automatically put some aside. My income can be very irregular at times, so budgeting for this can be hard. A good rule of thumb is to pretend you’re employed and work out a rough amount of the tax you would be paying, and then add some onto this to cover unexpected bills and slower work times. When I'm lucky enough to get a larger-than-usual paycheck, I try and save as much as possible to compensate for times when less money is coming in. There are also apps such as Chip which can help you save smarter by saving little bits here and there automatically, based on what you can afford.
Keep an eye on things
It’s easy to feel overwhelmed when you’re managing your own finances and stick your head in the sand. Rather than doing this, check your bank account regularly to ensure you're on track - it's not particularly fun, but if you don’t have a consistent paycheck, it's crucial. I also have a Monzo account for everyday spending, and their app is brilliant at helping me stick to a budget.
Talk to other freelancers
Chat to other freelancers about how they do their tax - it can be really helpful. They can recommend useful apps, accountants, and quick wins that they’ve figured out across their time working for themselves. Also, sometimes you want to just have a good moan - it can be complicated and nobody understands this more than other sole traders.
Make the most of stationary being a claimable expense by investing in some lovely colour-coded folders for your receipts, and make Excel your best friend. Staying organised can make a huge difference when it comes to keeping your affairs in order - no more crumpled receipts fished out from the back of the sofa, for example. Not that I’ve ever done that.
Don’t be intimidated
You might think me weird, but now I kind of enjoy doing my tax. It’s nice to see how my client base and income has developed over time, and keeping everything organised and up to date appeals to me. At the end of the day, it’s not this terrifying process that it might feel like - sometimes you just need to take a deep breath and get it done, and there are plenty of resources out there to help you.
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