Like a lot of parents, I’m super busy and don’t have time to trawl the Internet researching a topic, let alone understanding it in my sleep deprived brain fug. So I’ve done the work for you, condensing topics down to the essentials you need to know plus more detail if you need it.
Accounting for your income and expenses when you’re self-employed may seem like a scary prospect, but it doesn’t need to be. If you get yourself set up with a simple system, and get your head around what you need to record, then you can do most of it yourself.
What You Need to Know
- Once you have decided to become self-employed, you should start keeping records straight away
- Register as self-employed and for self assessment with HMRC (see our post)
- A tax year runs from 6th April to 5th April in the following year
- Expenses must be able to be attributed to your business, but there are some costs which can be proportioned
In More Detail
As soon as you become self-employed, start keeping records of your income and expenses. This is even if you haven’t registered with HMRC yet, or started trading. It will be much easier for you to present an accurate picture of your incomings and outgoings if you have all the details to hand. Plus it is likely that you will incur expenses before you start gaining income, so this needs to be factored in.
Establish a system to record your transactions, but make sure that this works for you. There’s no point signing up for expensive accounting software if you’re not going to use it. For your self-assessment return you only need your total figures, so however you choose to get to them is up to you. A spreadsheet is a good option, as you don’t need to rely on a calculator!
The following items all count as income and are very easy to track –sales to customers, selling advertising space or AdWords, affiliate sales and cash payments (such as for a blog post). As a general rule, if you have been given a product for a review and are going to keep it for personal use then it does not count towards income. If you are going to sell the product on, or use it to drive further income in to your business, it does count and needs to be recorded.
The rule here is that you can deduct expenses from your income if they are incurred wholly and exclusively for your business, ie. You only incurred the expense because of your business. Good examples include buying stock, phone bills, internet and website costs and marketing expenses. You will need to work out the proportion of these costs which relate to your business though (use a % to split the total costs). You can not include any entertainment costs, or subsistence (food and drink) unless it was for an overnight stay specifically for your business.
You can also claim for the costs for working from home. There are specific rules for this, if you work between 25-50 hours from home per week you can claim a flat amount of £10 per month, this increases to £18 per month if the number of hours is 51-100 per week.
If you have an expense for an item that you will be keeping for longer than one year (for example a new laptop or phone), record these separately to the other expenses. These costs will contribute to your Capital Allowances figure on your self assessment return.
This is much harder to do after the event (or at the end of a tax year!). Update your system with all income and expenses, however small. Keep the receipts and invoices so that you can refer to them quickly. If you are unclear on whether a transaction meets the income or expenses thresholds, keep a record anyway as it is easy to rule things out when you tally up at the end of the year.
It can make your life a lot easier to have a separate bank account for your business transactions, and this also acts as a reality check to whether you are making a profit or not!
If you operate under more than one business name (not including limited companies) you will need to split out the income and expenses for these, as they will need to entered separately on your self assessment return.
Make sure you record the date, type of income or expense, amount (including VAT) and relevant customer or company. The date is very important as you will need to allocate all transactions into the correct tax year. This is called cash accounting and is the simplest method for preparing your records. Traditional accounting is another option and would be more suited to you if there is a long time period between you making a sale and actually receiving the money.
Save for the Future
You will need to contribute towards your tax and National Insurance accounts on the 31st July and 31st January each year (see Becoming Self Employed post). Therefore it makes sense to keep some cash aside to cover this, as a general rule, taking 30% of profit will more than cover your liability.
You should also look into contributing into a private pension plan if you don’t already have one through your existing employment.
Seek Professional Help
If it’s still making your brain hurt to think about all of this, or your income and expenses are complex, there’s no shame in asking for help from an accountant! It doesn’t have to be expensive, and you can make their lives (and your bill) a lot easier by keeping the right records.
There’s a lot more information on the HMRC website, but be careful that you are looking at the correct section, Look for short accounts instead of full accounts.