Around 4 million of us in the UK are self-employed. That’s 4 million human beings who climb out of bed each morning and work harder than it sometimes seems possible to realise a goal. To achieve a dream. To live life on their terms, creating their own income, business and life. RJF salutes you. You are the engine room of the economy, the entrepreneurial spirit that Britain is known for.
But it’s not easy, sometimes we make mistakes, we push in the wrong direction, and sometimes make bad decisions. But drive, determination and resilience will push you through! We see a lot of small business operations in our line of business, and sometimes we see the same mistakes happening again and again. So we decided to collect 5 of the most common mistakes and traps and share them with you, so you can avoid them!
Mistake #1- Not saving for tax
Every year we act all surprised when it’s time to pay our tax! “Oh, I forgot it was tax time!” Let’s be honest here, no one REALLY forgets, it’s more like we choose to push it to the back of our minds! An easy way to work out what you need is to see what your tax bill was last time, adjust % wise for any growth this year or big expenses last year. Divide it by 10, then stick that in a savings account each month.
Divide by 10? Huh? I thought you were an accountant, there are 12 months in a year!! Yep… but if you do ten, then if there’s a really tight cash flow month you have 2 months spare. Or if you make all the payments you have enough left to spend.
Mistake #2 – Forgetting about payments on account
Ah, the old payments on account chestnut. HMRC wants not just the tax owed but also wants some of the tax you will owe next year! They are basically advanced payments towards your tax bill and you have to make 2 of them each year. The first is on 31st January and this is half of your previous year’s tax bill The second is 31st July and again this is half of your previous year’s tax bill
So essentially you are one year ahead with HMRC. Then when you submit a return you pay the balance owning (plus the next year on account!)
You don’t need to make any payments on account if you pay less than £1,000 in tax or more than 80% of the tax you owe has been paid already.
So, payments on account – don’t forget!
Mistake #3 – Not keeping good records
If you’ve read any of our other articles this may seem like a broken record… but we see this error time and time again. Keeping good records means you save money. Huh? Yes!! If you keep good records you’ll know exactly what that invoice was and probably include it on your tax return as an allowable expense! What usually happens is you can’t find the receipt, don’t know what it’s for and just don’t include it in the expenses section of the tax return. There are loads of apps out there and free tools to help you keep good records. None of them are hard or takes any time, they just need you to get into the habit of doing it regularly.
Mistake #4 – Muddling personal and business expenses
Another common one for the self-employed with an easy fix. If you are mixing personal with business expenses in one bank account you are getting yourself in a mess. It’s hard to separate business from personal and just adds more admin time to your bookkeeping.
Setup another bank account in the name of your business. You don’t need a limited company to set up a business bank account, most banks allow you to set one up as an individual with a business name on it. That keeps all of your records clean and separate.
It’s not a legal requirement for you to do this (unlike a LTD company) but its good practice. Plus if for any reason you were to be investigated by HMRC, you can quite easily share business bank statements for total transparency without the need to mix with personal spending.
Mistake #5 – Not budgeting well
You know how it is… one bumper month and you think you’ve cracked it. Cash is flowing, you’re spending and growing. The next month, nothing. Argh! You thought the increase in work would last and it hasn’t. What now? We are all optimists at heart, we want to grow, succeed and do well in business. But the entrepreneur in us can sometimes get a bit carried away! Plan out your year, work out what you have to spend based on sensible revenue estimates and stick to it. Then your cash flow is smoothed out and you can weather any storm more easily.
If after say 12 months things are looking up and there’s a trend to the increase you can adjust accordingly. The trick is to be cautious with the spending (not because you don’t want to invest and grow) but because having a bit of a war chest to fight through tricky times is the right thing to do.
Anyway, I hope these were helpful and if you’re self-employed looking for an accountant who has got your back and speaks your language, then get in touch.