Literally. I have had nightmares about my tax return through the years. We’re in January, and you’ve only got 21 days left to complete your tax return. Cue panicked weekend meeting scheduling with friends of friends who are accountants and can help you out.
Not this year, for me. I’ve finally graduated to having an accountant. No more tax return panic for me. I’ve done four years of self-assessed tax returns now. It was one of the most stressful parts of being a freelance designer, for me. So, here are some notes for creatives who have just become freelance. (I’m not a finance person so take what I say with a pinch of salt – this is just a starter for ten from a designer’s point of view.)
How I feel when I’m avoiding doing my tax return.
You’ve put in time at design school, and you’re getting work as a designer. You are awesome. You’re living the dream! Maybe with a bit less cash than you imagined you’d have, but still. You get to do cool projects occasionally at least.
But… they didn’t teach you how to be a freelancer at design school. And it seems the only way to get work is to be a freelancer, because it’s really hard to get a steady job at a design agency. You have to learn the hard way how to network, how to build an online presence for your work, how to make your website look professional, how to set your rates, how to organise your time for freelance working around other part time jobs, how to not take on too much work, how to give clients what they want AND produce work you’re not ashamed of (non-designers ask for odd things sometimes where they feel they know what looks good but really they have no clue and don’t respect your years of training), and then, how to deal with your bloody tax return.
The tax return is especially scary because there’s a deadline, government is telling you that you have to do it or There Will Be Consequences, and there’s a lot of language and concepts that you don’t understand. ‘Capital gains’ is not a phrase they teach you at design school.
People just expect you to know all this stuff, and you don’t, so you feel inadequate. You feel that you have to seem calm, collected and confident when it comes to the business side of your work, even though you have no frigging clue, and inside you’re panicking. Doing all this other stuff takes time, which you are not directly paid for. Because you don’t know how to do a tax return, you have to spend time learning to do it, too, so it takes longer the first few times.
Of course it’s stressful. Many designers end up losing sleep over tax returns. Don’t be ashamed that you don’t know how to do it. Ask for help. Plan ahead – block out time to do it. Take on less work to free up time. If you’re avoiding it, just open the HMRC self assessment page and log in, and maybe it will seem a bit less scary, so you’ll end up filling in a bit. Don’t do it late at night or you will make mistakes. Once it’s over, you will feel relief and you can give yourself a treat and a pat on the back.
Get help from an accountant
Find an accountant through people you know. Ask your friends. Ask your parents. Ask on Twitter, and Facebook. Go through your networks to find someone willing to look at your tax return for free just to check you’ve done it correctly. Without this, you may have done something incorrectly without knowing, which can come back to haunt you with more problems. Put in the effort to find some help now, or you risk having to firefight problems later.
It’s got better, I swear
The tax return system on the gov.uk website has got sooo much better thanks to service designers in the Government Digital Service. They’ve made the process easier to understand, and more secure to log in to. It was much harder before. If you’ve been doing tax returns for a couple of years already, take comfort that it’s going to be easier this year than it was before.
The process is not just a case of filling out the form online. First, you have to file your receipts and invoices. Then, you create a spreadsheet to add everything up. THEN you have figures that you can use in your tax return. So, there is work to do beyond just the tax return form.
Lots and lots of spreadsheet cells.
Receipts – what’s useful and what’s not
When I first started, I thought that I had to keep ALL my receipts. I ended up with a sea of Sainsbury’s receipts that I had to dig through to find the useful ones. The receipts you keep should be for work-related things. If you’re a designer, there are things that benefit your career that you enjoy anyway – these things still count as something you can list in your tax return. Going to that exhibition influences your work – it’s a kind of training. These are called ‘allowable expenses’.
– books on design, business, self development, or contextually related to projects
– paper, pens, any crafting materials at all
– design magazines
– computer stuff (repairs, Adobe software, other software, computer casing) and cameras
– 70% of your travel expenses (or however much you travel for work)
– 70% of your phone bill (or however much you use your phone for work)
– studio/co-working space rent
Also keep a log of what you give to charity. Buying stuff in Oxfam doesn’t count, but giving charity shop donations does (make sure you fill in their form when you give a donation).
Buying a coffee for a client or a mentor does not count as an ‘allowable expense’. Clothes and lunch while you’re working also won’t count. These are called ‘disallowable expenses’.
Eventually you’ll get a few useful numbers out of your spreadsheet.
Why receipts are valuable
Earnings – allowable expenses = taxable earnings
So if you earn £12000, and you spent £1500 on ‘allowable expenses’, you would have £10500 in taxable earnings. And anything under £11000 is not taxed. So it really is worth keeping your receipts for ‘allowable expenses’, because it will save you money.
Receipts – make a system for yourself
Tax years, confusingly, are not the same as calendar years. They begin on 6th April and end 5th April the next year. This can make things confusing when you file receipts. I’ve found receipts in the wrong pile so many times. Make sure you check through to prevent missing out on listing your expenses against your earnings.
You are creative. Make a filing system for yourself. What I do is, stuff all my potentially useful receipts into an envelope marked ‘needs to be filed’ as I go along. Every few months, or just before I have to do my tax return, I’ll go to a cafe, get a nice coffee to perk myself up, and comb through these receipts. I’ll lay out other envelopes. On one I write ‘allowable expenses 6/04/2015 – 5/04/2016’ (for example) and another ‘allowable expenses 6/04/2016 – 5/04/2017’, and another ‘disallowable expenses’. Writing these dates on the envelopes helps me not get confused about the tax year date. The receipts for the current tax year will have to be looked at next January, so keep them safe.
Then, once I’ve got all the receipts from the last tax year in one envelope, I’ll put them all into a spreadsheet.
Hopefully your spreadsheet won’t look as messy as this.
Spreadsheet – what needs to go in it
I set up different tabs:
– total figures
– stationary (books also go here)
– journals & other (exhibition tickets also go here)
– equipment (computer stuff)
I use the total figures tab at the end of the process, to put all the useful numbers in one place, ready for when I open up the tax return form online.
On the income tab, I list the months of the year (April-April) on the side, and along the top I list the different people that have paid me. I write in how much I invoiced them in each month. All this added together is your total earnings of the last tax year. (Btw, it’s useful if you keep all your invoices in folders on your computer that correspond to the tax year dates.) If you’ve also worked for someone not as a freelancer, you can list this here too – you should have figures for what you earned from them on a ‘P45’ which is the form they give you when you leave. You’ve already been taxed on this, so don’t include it in your freelance ‘earnings’ figure.
On the other tabs, the column headings I use are:
– from where
– business percentage
– cost x business percentage
The ‘business percentage’ bit is for your phone bill and your travel – which you can set at 70% or whatever. Otherwise, for everything else, leave it as 100%. In the last column, you use the spreadsheet function to multiply the last two column entries.
The most useful spreadsheet trick is typing in ‘=Sum(‘ then highlight the cells you want to add together by clicking on the first one and dragging down to the last one, then press enter. It’s worth learning a few spreadsheet tricks from your friends that know about admin – it will save you a lot of time.
Once you’ve added everything up, you have figures for your earnings and your allowable expenses that you can put in to your tax return.
I made all this up for myself based on what I read online. The accountant friend of friend that helped me said it was all right. I’m sure there are better ways out there than the spreadsheet and filing systems I’ve created for myself 🙂
A fun-loving backstreet hairdresser in Montreal who we trusted with our hair for just $30.
When to pay for an accountant and set up a limited company
Accountancy fees are not like going to the hairdresser. Expect to pay about £1500 each year unless you can find someone who will give you mates rates. And if you want to set up a limited company, you need an accountant. Because of the cost, it’s only really worth setting up a company if you will save more than £1500 in tax.
If you earn up to £11,000 you don’t pay any tax.
If you earn up to £43,000 you pay 20% of tax on the money you earn which is over £11,000.
If you earn up to £100,000 you pay 40% of tax on the money you earn which is over £43,000.
For the tax you save to be more than the cost of the accountancy fees, you need to earn around £50,000 in a tax year. If you’re not there yet, don’t worry about the hassle of setting up a limited company. I’m not even sure that I’m there yet… but the cost is worth it for me, because I hate doing all this finance stuff so much.
The benefit of having an accountant is that you don’t spend so much time on your money admin, and they can save you a bit of money in tax. The benefit of having a limited company is that you save a bit more money in tax, and you get perks such as buying drinks for your clients counts against the tax you pay. (I think I’ve got this right – please correct me if not!)
Onwards and upwards!
If you’re doing your own tax return, that means you’re amazing enough for people to have hired you based on your creative talent. Be proud of yourself.
Please don’t take anything I’ve said as an absolute truth – this blogpost has not even been checked by an accountant, and I’m not an expert in this area. This is just a starting point, with simple language, and an understanding of what it’s like to fill out a tax return from a designer’s perspective. Whatever you do with your tax return, please have it checked by someone who knows what they’re doing.
If you know I’ve got something wrong in here, please let me know. And if this has helped you, please pass it on to other friends who it might help, too.