8th January 2024Tips for self-employed individuals when preparing their tax return

A self-assessment tax return can look daunting; however, with the right information and a little insider know-how, it can become a lot simpler. In this article, Sam Dewes, Private Client Partner, takes you through some key elements of your tax return to make sure you get it right.

Deductions from your self-employment income

Typical deductions that a self-employed person can take against their income include:

• Amounts paid for items for resale.
• Non-commuting travel expenses.
• Office or business premises costs.
• Marketing and advertising expenses.
• Professional memberships.
• Certain legal and professional costs such as accountancy fees for preparing your accounts.
• Business insurance.
• Wages and other staff costs, even if the staff aren’t taxed on trivial benefits, they are still deductible the employer.
• Costs of working from home.

HMRC offer a simplified expenses system for these costs whereby a flat rate deduction is given per month depending on the number of hours for business use. The maximum deduction available under the simplified expenses system is £312 per year. This relief is no longer available to employees who work partly at home.  Alternatively, you can claim for the certain actual costs incurred on working from home, provided you include the business use element only. Self-employed people need to be careful when claiming business use of parts of their home as this can give rise to separate issues such as potentially impacting on main residence relief for capital gains tax when they come to sell.  It can also potentially create legal issues if it impacts on the residential status of the property.

The general rule is that deductions are not available for tax purposes unless the expenses are incurred “wholly and exclusively” for the purpose of the business. The “wholly” part allows for some flexibility as some costs can be apportioned. Capital costs will not be allowed unless they qualify for capital allowances.

However, some genuine business costs are not allowable for tax purposes. Networking may be a vital part of making sales, but business entertaining is not deductible for tax purposes. Goods taken for personal use also need to be accounted for at resale value, you cannot simply disallow the purchase price (or ignore it as ‘wastage’!)

Following an announcement in the Autumn Statement 2023, from 6 April 2024 most trades will be able to calculate their profits on a cash basis, rather than accruing for income and expenses.  The existing restriction on claiming interest deductions under the cash basis will also be removed from that date.

Reporting periods for your profits

Many self-employed people will report their profits based on their accounting period rather than the tax year under complex rules known as “basis periods”. The current tax year 2023/24 is a transitional year in the move towards all businesses reporting profits based on the year to 31 March or 5 April from 2024/25 onwards.  The transitional period may mean increased profits fall into the 2023/24 tax year. Those who do not already report profits based on the year to 31 March or 5 April should consider how this will impact their tax liability for 2023/24 and budget accordingly.

Payments on account

Self-employed people are often required to make payments on account. These are due where their tax liability exceeds £1,000 and 80% or less of the total tax payable is collected through PAYE.

Payments on account are two advanced payments (payable on 31 January and 31 July) on the tax liability for the following tax year.  They are calculated on the assumption that the tax liability will be the same for the following tax year. For an individual making payments on account for the first time in their 2022/23 tax return, their liability due by 31 January 2024 will be 1.5x the liability for 2022/23.

It is possible to reduce the payments on account manually in your tax return if you believe that your tax liability for 2023/24 will be lower than 2022/23.  However, if the liability turns out to be higher than the reduced payments on account made, interest will be charged (currently at 7.75%) on the amount by which they are over-reduced.

Claim for higher rates of pension tax relief

If you have made personal pension contributions (e.g. to a SIPP) and you are paying tax at 40% or 45%, you can claim tax relief on your return. The relief effectively brings more income into the 20% tax band from the 40% and 45% bands. It is claimed on the “grossed up” contribution to the pension scheme, which is the amount that the pension scheme receives after the 25% top-up from the government.

There is also a benefit for those earning between £50,000 and £60,000 a year and claiming child benefit, as the pension contributions can reduce the amount clawed back by the Treasury.

Finally, personal pension contributions reduce your income levels for the purpose of calculating whether or not your tax-free personal allowance has been abated for incomes over £100,000.

Claim for charitable donations

You can claim for charitable donations made under Gift Aid.  The relief works in the same way as it does for pension contributions with two exceptions. Firstly, if the 25% government top-up received by the charities exceeds the amount of tax you are charged, you will be required to pay the difference through your tax return.

Secondly, gift aid donations made in the current tax year up to the point of filing the tax return (assuming it is filed on time) can be carried back to 2022/23 in order to accelerate the tax relief. This also has the same Child Benefit and personal allowance effect, so the overall cost can be less than expected. Remember to check those museum tickets from the summer holidays – some of them might actually qualify for tax relief.

If you have any queries, please get in touch with Sam Dewes.