The Interior Designer Business Owner’s Guide to Tax Returns
If you are like most interior designers, you would rather spend your time poring over mood boards than your tax return. But knowing the tax obligations of your interior design business, keeping accurate records and understanding how to reduce your tax burden is a necessary part of running a successful interior design business. The more you know about how to do your taxes as a small interior design business owner, the less likely you will face unpleasant budget surprises when taxes are due, penalties for late payments, and burdensome inspections.
This startup guide details what are the taxes for a small interior design business, how to calculate your tax as an interior design business owner, and tips for claiming the allowable expenses you have the legal right to. As always, this article is not intended to replace the advice of professionals, such as accountants and solicitors. Click on a link below to jump straight to the section you’re most interested in:
What are the Financial Responsibilities of a Small Interior Design Business?
Here we look at the five financial elements that owners of small interior design businesses are responsible for as a self-employed professional:
- Register with HMRC When you set up as a self-employed interior designer, you must register with HMRC for Self Assessment tax returns and National Insurance. This can be done by the 5th October in your business’s second tax year. HMRC will then send you your Unique Taxpayers Reference which you will need to file your Self Assessment tax return.
- Put Aside 20%-30% for Your Tax Bill Start recording your income and expenses from day one in order to keep track of how much tax you will owe by the end of the year. The current income tax rate is 20%, which increases to 40% for earnings above £50,270, and 45% for earnings over £125,140. Any earnings below £12,570 are known as the Personal Allowance and are tax free. It’s good business practice to put aside between 20%-30% of your gross income, so that you have a substantial amount of savings in the bank when it's time to file your tax return. Not putting aside 20% of every payment will result in you facing a huge and stressful bill at the end of the year. A top tip is to file your accounts quarterly to give you a clearer estimate of what you will owe when tax is due.
- File your Self Assessment Tax Return As an interior design business owner you must report your income to HMRC through your Self Assessment tax return by 31st January every year. Your personal tax return will detail your trading profits from the previous tax year ( (the UK tax year runs from 6 April to 5 April), as well as national insurance that is due. Your trading profit is all your income less any allowable expenses, such as meals, office supplies etc (see more details on allowable expenses below). This is then the figure that your tax and national insurance bill is based on.
- Don’t Forget Payment on Account Ensure you make provisions for your payment on account which is normally 50% of your previous years tax bill, payable by July 31st of the current year.
- Payroll Tax When you have employees, it’s your responsibility as an employer to deduct tax and national insurance contributions from an employee’s pay through the Pay As You Earn (PAYE) system, and inform HMRC about any taxable benefits an employee receives.
Tax Deductions Interior Design Businesses May Qualify For
The good news is that many of the costs of doing business are deductible and can offset the amount of taxes you will pay. Doing your write-offs due diligence can bring significant savings. And knowing from the start that you can deduct purchases of software, or the costs of travel, can help assure that you will keep accurate records of those expenses throughout the year. Here are some common deductions. Check with your accountant for more details:
- Travel and subsistence Travel expenses to meet clients and suppliers, visits to construction sites and attending trades shows are fully tax deductible, as are the teas, coffees and food you consume while travelling. You can claim back any taxi, train or bus fares, while mileage in your own car is charged at 45p per mile.
Top tip: Use a separate business credit card to track your expenses, not your personal one, so you can maximise your claims against your profits and save on corporation tax.
- Meals and Staff Entertaining Many expenses for food incurred during travel or meetings with clients can be deducted when conducted on behalf of your business. If you employ staff, HMRC are on your side and offer every company £150 per staff member and their partner per year as an entertaining allowance. This can either be spent all at once at a large Christmas party, or split through the year at two or three events, just as long as the cost stays within the £150 per staff member allowance.
- Office Equipment Any equipment that is relevant to your trade and helps you do your job, such as laptops and cameras, is deductible from your profits. The government’s newly introduced scheme called the Annual Investment Allowance, allows you to deduct 100% of equipment costs, up to one million pounds in total, through your business.
- Office Rental Renting an office space is typically deductible.This also typically applies to the cost of renting a co-working space or space for events. If your expenses include covering the cost of utilities you can deduct those costs too.
- Working from home If your interior design business is located in your home, HMRC offers professionals a £6 per week working from home allowance, which is an allowable tax deduction that can be claimed back against the company. Another way of claiming this allowance, is to proportion a sixth of your household expenses (such as energy bills and council tax) for your work from home allowance and claim this back from your company. For example, if your yearly household expenses are £3000, then your work from home allowance will be £500.
- Pension You’ll be pleased to hear that pension contributions are fully tax deductible and a great way of topping up your savings for the future. If you have any excess profits at the end of the year, consider reducing them in order to pay less corporation tax by paying a little more into your pension.
- Mobile Phone & Internet Bills Figure out the percentage of the time you are on your devices doing business to determine this deduction. Every text, phone call, and email interaction with clients, vendors and subcontractors counts. So does the time you spend creating proposals, tracking projects and sending invoices.
- Networking, Professional Development While running into a client at the gym may not be deductible, the cost of attending professional workshops, trade shows, seminars and even networking events directly related to your interior design business often are. Save all your receipts, and any other records related to the activity.
- Reference Materials The cost of e-books, print books, training manuals and other references used to operate a business are often deductible.They do not need to be specific to the interior design industry as long as they contribute to running a business.
- Software You are likely eligible to deduct the cost of software you use to run your business, as well as some of the other tech tools you use for editing podcasts, videos and photographs for example.
- Vehicle Purchase The bad news is that petrol or diesel cars purchased through a business are taxed very heavily. However, the good news is that electric cars are much more tax efficient, and the entire cost of purchasing or leasing an electric vehicle can be claimed against your business.This is to encourage the uptake of electric vehicles in the UK.
How to Prepare Your Interior Design Business for Tax Season
The more you record transactions as you go, and prepare for tax season throughout the year, the easier it will be to fill out your tax return when the time comes. Here are some tips to avoid headaches such as fines, inspections, late penalties and late nights scrolling through financial records:
- Think Taxes From the Start: From your very first job and invoice, think about putting aside between 20%-30% for tax and how you need to record this. Getting in this habit when you open the doors of your interior design business, will smooth your accounting journey throughout the life of your business. You may want to discuss this with an accountant to help get that plan in place, especially if you are making quarterly tax payments.
- Document Every Financial Transaction: Accurate and meticulous record-keeping is crucial for easing what can otherwise be a monumental task of filing tax returns. Figure your profits and deductions as you go, record all earnings and expenses as they happen.
- Keep Your Financial Documents Organised: Know where your records are filed on your computer or in your desk and find an organisational system that works for you so that you can find them easily.
- Get High-Tech Help: Purchase an accounting software that will allow you to track invoices, purchase orders, business expenses, inventory, and any other assets, expenses, or income. This will provide a detailed record that you or your accountant can use to help you estimate and make needed tax payments.
- Know the Deadlines: Mark your calendar and set alerts at the start of whatever your tax year is so that you will be reminded what you need to know when.
- Hire an Accountant: An accountant can handle all your finances, as well as file your tax return to ensure that you do not overlook any deductions, deadlines or responsibilities. But remember, you still need to provide them with up to date and accurate records.
- Integrate Your Accounting Software: When purchasing business management software make sure it plays well with your accounting tools so that there is a seamless integration between the operation of your business and your tax records.
Make Taxes Less Taxing for Your Interior Design Business
Few interior design business owners rush home excited about doing their taxes and it is easy for new business owners to feel overwhelmed by the complexities of tax returns. But establishing a routine and system from the first day you open your interior design business, and knowing what the taxes are for a small interior design business will ease the process so you can focus on running your successful interior design business.
If you think this industry is for you, find out more information about Interior Designer Job Responsibilities. For more help running smooth design business operations, start a free trial of Houzz Pro's interior design business software today.
The information contained in this article should not be relied upon as legal, business, or tax advice. We encourage you to seek guidance from your legal counsel, business or tax specialist with regard to how the information contained in this article may or may not apply specifically to your business.
