There’s no shortage of horror stories about famous musicians owing millions in unpaid tax, from James Brown and Lionel Richie to Lauryn Hill – who even served time in a Connecticut prison for it.
It’s not just superstars earning millions who need to file their own tax returns, however. Whatever your income level as a musician, Her Majesty’s Revenue and Customs (HMRC) doesn’t look too kindly on unpaid taxes or inaccurately declared income. So, if you’re self-employed, here’s some helpful advice for filling out your tax return.
Musicians typically fall into two categories of taxpayer – an employee, or self-employed.
The former category typically involves far less work on your part, as income tax is usually automatically deducted in each pay packet as with any other salaried job).
You shouldn’t have to do anything providing you’re on the right tax code for your income. However, if your employment changes, you should notify the tax office.
If you’re self-employed or carry out paid freelance work, you need to fill out a Self Assessment. You also need to do this in the rare instance you’re an employee for an organisation but still have to file your own tax return – for example, if you’re part of an orchestra.
This way, income tax on your earnings can be calculated. As part of your Self Assessment, you need to keep a record of your income and file a tax return yourself, or via an accountant. HRMC provide information about it here.
If this applies to you, you need to register for Self Assessment by October 5th 2020 and submit your tax return by January 31st 2021 to declare your income for the period April 2020 – April 2021.
Failing to do this will incur a fine, and further penalties depending on the length of the delay.
Tips to prepare for your tax return
- Even if you’re a salaried employee, you must register as self-employed with HMRC if you earn income on the side or on a freelance basis, so that income tax can be calculated.
- Keep a copy of all forms of correspondence you have with the tax office. This could act as evidence and may speed up the resolution of potential discrepancies.
- As a self-employed musician, you’re entitled to certain tax breaks like business expenses, which you’ll include in your tax return. We’ll look at these in more detail later in the article.
- Keep receipts for every expense. HRMC may ask to see them after you’ve submitted your Self Assessment. This is particularly important if you’re paid primarily in cash.
- It may not always be clear to you what constitutes a tax-deductible business expense, so when filing your claim include the receipts anyway. HRMC won’t penalise you for this or consider it disingenuous – it’s their job to assess what does or doesn’t constitute a tax-deductible business expense.
- Be honest with HRMC. As we’ve seen, tax evasion can land you in big trouble.
- Comply with HRMC. Everyone has to pay tax and it’ll go more smoothly if you just get it over and done with. Not to mention, if you don’t consult with HMRC they may just estimate your income, which is nearly always higher than your actual income. This means they’ll most likely demand more income tax than you’re legally required to pay until you contact them to rectify the mix up, which could take a while.
- Be responsible with your finances. Tax season will creep up on you, so it’s worth anticipating it by setting some income aside each time you’re paid.
How to keep business records
Gone are the days of sending HMRC a pile of business receipts, as most transactions these days are facilitated digitally.
However, you should still keep a record of every business transaction and back it up with evidence in case HMRC ask you for it.
You need to keep a record of:
- Sales and income
- Business expenses
- VAT records (if you’re registered for VAT)
- PAYE records if you employ people
- Records about your personal income
While you don’t need to include transaction receipts when you submit your Self Assessment, you may be asked to provide them later so make sure you keep them. Your transaction receipts could take the form of standard receipts, bank statements, chequebook stubs, sale invoices, till rolls or bank slips.
It’s essential you include these in your tax returns, as incomplete records may incur a penalty if your figures turn out to be wrong and you’ve not paid enough tax.
If this sounds complicated, don’t panic. There’s lots of book-keeping software out there to make this process easy for you. We recommend FreeAgent, QuickBooks or Xero, but Musicians’ Union even provide a free and simple Excel template here.
How to file your tax return
You can save and continue your Self Assessment and come back to it later, but this is the information you’ll need to hand to complete it:
- National insurance number
- Your profession, description and address
- The date your self-employment started or ended if it was in the current tax year
- The date your accounting year ends
- Number of employees
- Annual turnover figures and other business income
- Allowable expenses figures
- Figures of any losses from the current tax year or losses brought forward from an earlier year
- Information on any interest, dividends or pensions you receive
- Information about tax relief, for example marriage allowance, pension contributions or charitable gifts
The form will automatically filter out irrelevant questions based on your answers to previous questions, so the process is quite straightforward. It also contains helpful tips for each question if anything seems unclear.
Once you’ve finished, you can save a copy of your Self Assessment before submitting it to HMRC, which we recommend doing for your own records.
How to pay your tax bill
Once you’ve submitted your Self Assessment and had it signed off by HMRC, you need to actually pay the tax you owe.
In case you’re not already aware, tax payments must be made twice a year. The first deadline is January 31st and the second is July 31st. You’ll pay half of your tax for the year before each deadline. If you prefer to pay regularly through the year, you can set up a payment plan with HMRC here.
Make sure you pay HMRC by the deadline or you’ll be charged interest and may have to pay a penalty.
Here are some of the ways you can pay:
- Online or telephone banking
- Debit or credit card online
- At your bank or building society
- BACS (this may take up to 3 working days)
- Direct Debit (this may take 3-5 days depending on whether you’ve set one up before)
- Cheque through the post (this may take 3 working days)
Make sure you factor in weekends and bank holidays when you plan to pay your tax, as these may delay payment.
For more information about paying your taxes, see the HMRC advice page here.
Claiming business expenses
We’ve referred to allowable expenses and tax deductibles previously in this article. These are expenditures incurred by the cost of running your business and as such you don’t pay tax on them.
Here’s a comprehensive list of tax-deductible expenses a self-employed musician might claim:
- Instruments and musical equipment
- Instrument repairs/maintenance
- Recording studio/sound engineer fees
- Travel to and from performance/auditions
- Electronics such as laptops and mobile phones
- Software like Ableton or ProTools
- Sheet music
- Accountant fees
- Agent and booking fees
- Trade subscriptions
- Hotel expenses
- Motor expenses and mileage
- Performance wear or costumes
- Costume cleaning costs
- Marketing and photography
- Website management fees
- Specialist musical insurance
This should give you an idea of what constitutes a tax-deductible expense – it’s basically any expense that’s required for you to run effectively as a business. As we mentioned above, if you’re not sure whether an expense qualifies, include it anyway – HMRC will tell you if it doesn’t.
- HMRC advice pages for Self-Employment and the Self Assessment
- HRMC’s YouTube page features a number of helpful videos for filling out Self Assessment tax returns
- Musicians’ Union offer lots of useful advice for self-employed musicians’ tax returns
- Help Musicians’s Self Employment page provides a brief outline of the tax return process for musicians, along with some useful external links
- UK Tax Return is a third-party website offering tax advice
- Performance Accountancy and Gorilla provide specialist accountancy for musicians completing their tax return
Now you know how to protect your business from the tax man, you should think about protecting it from theft, damage and loss of your musical equipment. It is your livelihood after all.
At Insure4Music, we offer specialist musical insurance for professional, semi-professional and self-employed musicians. This includes Public Liability, Equipment cover and even Worldwide cover. You can completely customise your policy, so you only pay for what you need.
Get an instant online quote today and see what we can do for you.