With the cost of living soaring and invoices being paid late, freelancers could find themselves coming up short on not only their monthly bills but their upcoming tax bill. Here is a step-by-step guide on the best course of action to take if you think you will struggle to pay your tax bill in time
By Mike Parkes, tax expert at GoSimpleTax
Managing cashflow is one of the trickiest parts of being a freelancer. Whether you’re a sole trader or a limited company, when invoices are paid late it can cause major headaches.
As we approach the 31 January deadline for submitting your self-assessment tax return and making your payment, late payers and poor cash flow could cause you sizeable issues.
So, what can freelancers do if they can’t afford to pay their tax bill?
Firstly, don’t panic.
In an ideal world, you would have enough already set aside from your income throughout the year to pay your bill each January, but we all know the working world is far from ideal!
Some months you may simply not be able to afford to set a percentage of your income aside for tax, particularly in recent times when costs have risen. People may have seen their income start to slow because of an impending recession and may need to keep all their income in their current accounts for the time being.
So, if there’s not enough cash set aside for your tax payment in January, this is what you need to do:
- Act quickly
Do not bury your head in the sand. Complete your return as soon as possible so you know exactly how much it is that you owe.
If you cannot make the payment, get in touch with HMRC as soon as you can. In most instances they will help you set up a payment plan – called a ‘Time to Pay’ arrangement. These plans can be put in place for tax bills of less than £30,000 which you plan to pay off in less than 12 months.
- Make a plan to pay
You will need to ensure you set aside money each month to pay off your debt but also to pay for next year’s bill. Around 25% of your profits is about right for most people to ensure you have ample savings to cover your bill.
If you have savings or assets, HMRC will expect you to sell these to cover your debt.
- Set up a digital tracker
There is software available that can allow you to input your income and expenditure as you go so that you can have eyes on your expected tax bill throughout the year. This can be incredibly useful for budgeting, so you can put away exactly what you need. You may not need to save a full 25% each month, which can be very helpful when times are hard.
If you’re worried about your pending tax bill, it pays to be proactive. Sort out your tax return as soon as you can and work out exactly what you can afford to pay. The good news is that any payment plans with HMRC will not impact your credit score, because you don’t owe money on unpaid credit.
