SYP's Freelance Glance
For some years I have written a column for the Society of Young Publisher's magazine, sharing my experiences and pearls of wisdom on being a freelance , and book writer.
In this column, I cover the dreaded subject of tax – showing freelancers how to take care of their taxes.
Understanding tax for freelancers
One of the most common questions newbie and aspiring freelancers ask is, How does tax work? The subject has been on my mind this week – not only have I just completed development editing Tax For Dummies, but I’ve been marking the end of my financial year by spending several hours knee-deep in receipts, invoices and spreadsheets.
Benjamin Franklin hit the nail on the head when he said there are only two certainties in life: death and taxes. As much as you may detest record-keeping, calculations and handing over a single penny to HMRC, it’s a fact of life for a freelance writer, copy editor and proofreader. Thus, I’ve decided to share some of the useful things I’ve learned along the road from tax dunce to tax doer.
Get organised
I have to confess, I’m a bit of a Monica when it comes to organising my paperwork. On rainy Friday afternoons, when I’m cross-eyed from proofreading or wrestling with writer’s block, you’ll find me indulging in Admin Hour, amid Excel docs, piles of paper and vibrantly coloured stationery.
Creating a logical accounts system (and sticking to it) makes life a lot easier. If your bookkeeping method is of the file-invoices-and-receipts-down-the-back-of-the-sofa variety, beware. You’ll struggle to keep a grip on how much you’re earning and spending, and on who owes you what. Come tax return time you’re likely to go into meltdown, and if you’re unlucky enough to face an HMRC inquiry, the taxman will definitely not have a sense of humour about the chaos that is your accounts. Failure to keep adequate and accurate records leads to fines; it’s that simple.
Don’t get carried away
When you first go freelance, the freedom to offset business expenses against your income (thereby reducing your tax liability) can be giddily intoxicating. It’s easy to get carried away thinking about what you can ram through your books to bring down the tax bill.
The reality, however, is that business expenses aren’t the cushy deal they may appear to be at first glance. HMRC has strict rules governing what expenses you can claim, and to what levels. For example, because I work from home I can claim a proportion of my household bills. The operative word here is proportion – I can claim expenses for a proportion of a room, used a proportion of the time. In reality, this works out to be a teeny, tiny expense, and saves very little in tax. My last electricity bill was £50; I was able to deduct just £1.33. Not exactly a tax saving to get excited about!
Prepare for tax bills
For me, one of the hardest things about being a freelance proofreader, copy editor and writer is getting paid but knowing I mustn’t touch some of the money. Life was far simpler when I received after-tax pay each month! Now, I must have the self-restraint and sense to put aside a wodge of my income ready for the next tax bill.
When I started out, I was woefully naive about such tax planning. For most of my first year in business, I spent what I received from clients. Then, towards the end of the year, it began to dawn on me that I’d been spending money that didn’t belong to me at all. Between 20 to 30 per cent of my earnings belonged to HMRC (and the Student Loans Company had dibs on a further slice).
To top if off, I’d completely misunderstood HMRC’s ‘payment on account’ system. It was a rude shock to discover that my first tax bill would comprise not only the tax I owed for the last financial year, but half as much again as a payment on account for the current financial year. In my ignorance, I spent a good half hour ranting at a poor HMRC call centre operator, convinced that the taxman was robbing me blind.
Since that first year, I’ve ensured I place a proportion of my income into a high-interest savings account, ready for the next tax bill. That way, I don’t wake up in a cold sweat in the run up to a tax bill, because I know the money is ready and waiting. Even better, I make a tidy profit in interest, which I can then use to treat myself.
Don’t think twice about getting advice
No one expects you to grasp the intricacies of the UK tax system easily or overnight. However, getting it right it essential, especially if, like me, you do your own accounts and don’t hire an accountant. So you need to gem up on how self-assessment works, and get help where necessary.
There is a wealth of books and websites on the subject, and organisations such as Business Link can help. HMRC have plenty of helplines and online support, but do beware: first, their ‘help’ materials are often impossible to comprehend (they spectacularly fail to embrace plain English); second, when you ask HMRC for advice, they will always give you an answer that leads to you paying the maximum amount of tax that’s legal. The government lay down tax law, and others interpret it. Therefore, your best port of call if you’re stuck may be an independent tax adviser.
New book: How to Succeed as a Freelancer in Publishing
I'm currently co-authoring a book with Emma Murray called How to Succeed as a Freelancer in Publishing, which will be published autumn 2010 by How To Books. The book offers advice on how to build a freelancing business in your chosen publishing field – from proofreader to copy editor, ghostwriter to author, typesetter to graphic designer. So watch this space for plenty more top advice on making it in publishing.