The Low Incomes Tax Reform Group (LITRG) has published a guide1 to help the self-employed understand the tax system better. The guide is a response to LITRG’s concerns that low income self-employed people do not understand fully their tax position and the interaction with some benefits, and to worries about the impact of reduced guidance and face to face help for taxpayers from HMRC.
The last ten years have seen a large rise in the number of people who are self-employed,2 many of whom earn a low income, perhaps work in the ‘gig economy’ and are unable to afford paid tax advice. LITRG’s guide supplements the groups existing website material by explaining some of the less common tax rules affecting the self-employed. It discusses areas such as how to prepare accounts and a Self Assessment tax return, tax allowances, partnerships, taking on staff and registering for VAT, and the tax responsibilities when a business ceases to trade.
Head of Team at LITRG Victoria Todd said:
“We are concerned that some self-employed people may struggle to get their tax affairs correct because of the UK’s complex tax and benefit rules which seem to be changing constantly, coupled with a reduction in detailed guidance from HMRC. Most self-employed workers want to get their tax right and our online tax guide will help them with the difficult task of staying on top of changes to the tax system while running a business.
“There have been some important changes to the tax system in recent years that affect low income self-employed workers, with the introduction of the trading allowance, cash basis and simplified expenses, as well as the start of HMRC’s Making Tax Digital for VAT programme. There are also significant changes to the benefits system with the introduction of universal credit which is replacing tax credits, among other benefits.”
The LITRG guide is split into two parts: the first considers the main areas that concern most self-employed people with straightforward tax affairs and also covers in greater detail more complex areas which may arise, for example, if you are claiming certain state benefits or have additional tax obligations such as registering for the Construction Industry Scheme (CIS); section two includes general useful information such as advice on contacting HMRC, important tax deadlines and checklists. It also contains a case study showing how a newly self-employed taxpayer would prepare their accounts and Self Assessment tax return.
Victoria Todd said:
“We appreciate that it is difficult for low income self-employed workers to understand all of the tax rules and reliefs which may apply to them, not least because it is difficult to know what to search for online in the first instance. Although some guidance is available from HMRC, it often lacks detail and does not bring everything together in one place. It would be helpful if more tailored information was made available for the self-employed by HMRC, for example links to tax information for specific trades – until then, the LITRG guide will help anyone who is self-employed to gain a better understanding of their rights and responsibilities in relation to tax.”
LITRG’s five tax tips for low income self-employed
We strongly recommend that you understand your employment or self employment status before you start work because if you are self-employed you will have no entitlement to any employment rights, which include rights like paid holidays and sick leave; and you will have to take full responsibility for your tax affairs.
It is very important that you keep personal transactions (such as drawings) separate from your business transactions – although this does not necessarily mean that you need to have a separate business bank account (depending on your bank’s terms and conditions).
If you want to keep things simple use an accounting date of either 31 March (if you prefer to work in whole months) or 5 April so it matches the tax year.
It can be quite a shock to your cash flow when you first move to payments on account. It may help you to put a certain amount each time you are paid into a different bank account. Remember you will need to save an additional amount for the first time you move into the payments on account system as you will be starting to pay your tax earlier.
Do not forget to notify HMRC (for tax credits), DWP (for universal credit and other means-tested benefits) or your local authority (for housing benefit and council tax reduction schemes) if you have stopped being self-employed.
Notes for editors
1. New LITRG guide published to help the self-employed and their advisers understand the ever-changing tax system here.
2. The number of self-employed increased from 3.3 million people (12 per cent of the labour force) in 2001 to 4.8 million (15.1 per cent of the labour force) in 2017 – ONS Trends in self-employment in the UK. As of May 2019, there were 4.9 million in self-employment, according to the ONS – see here.
3. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk
Out of hours contact: George Crozier, 07740 477 374)