So you’ve started a bit of a side hustle. Great work. And you are actually starting to see the money coming in from all that hard work. Amazing! But don’t forget that all income must be taxed, and you don’t want to feel the sting of HMRC when you get a letter in January telling you that you owe them a lump sum, but you haven’t prepared or put some money aside every month to cover it.
If you are reading this post, it means that you are already in the best mindset, and are looking for a little advice on how to be prepared. Let us outline your different options below.
How Much Should I Put Aside for Personal Tax?
One of the most manageable ways to tackle personal tax is to make sure you are putting a portion of your income away as savings each month. This will ensure that you have a pot of money ready to dip into for the very purpose of tax when that bill comes around. But how much should you put away?
Talking to friends and family, you have probably heard that you should put away 30% of your income, and it is pretty sound advice, if you are earning a relative amount of money on your freelance services, the Basic Rate tax will be charged at 20%, with national insurance coming in at 9%. Putting away that extra 1% is always advisable, it’s great to have a buffer, just in case.
Not all Businesses Will be Charged the Same Rate
So how do you know what rate your income will be charged at? If your freelance work is your sole income, take a look at the table below to see the tax charges you will incur. However, if you have an income alongside your freelance work, for example, a salaried job, your tax will be calculated on the amount of your entire income, both jobs combined. Fr example, if you earn £1,000 a month as a freelancer, but alongside this, you have a salaried job that pays £40,000 you have already used your personal allowance with your salary, and will now be taxable in the Higher Rate Band with a total income of £52,000.
How Should I Approach Income Tax
As soon as you become self-employed (Otherwise known as a Sole Trader) you should tell HMRC. The very latest you can register with HMRC is by 5 October after the end of the tax year during which you became self-employed. For example, if you started your business in June 2018, you would need to register with HMRC by 5 October 2019.
To make sure that you are on top of your taxes, especially if this is all very new to you. It is highly recommended that you hire an accountant to make sure your taxes are correct to breaking any tax laws and finding yourself in deep waters. If you need help or advice, get in touch with us today at Aston Black.