How to: Manage Your Accounts

If you are a performing musician, it is almost certain that you will earn at least part of your living in a freelance capacity: in other words you earn your money by working for different people, getting paid on a job-by-job basis.

But just like people in regular employment, you are required to pay your share of income tax. You are allowed to earn a certain amount tax free (£8,105 in 2012-13, increasing to £9,205 in 2013-14). Any earnings above that are taxed at 20% – there are higher rates for higher earnings too (but not until you are earning some way over £30,000 a year). You are also required to make National Insurance contributions. For most people in regular employment, paying tax is a simple task: it is automatically deducted from their monthly pay through PAYE (‘Pay As You Earn’, a scheme that all employers must operate). But if you work freelance, you are entirely responsible for handling your tax affairs.

Even if you have regular employment, and pay tax through PAYE you are still classed as ‘self-employed’ if you earn money outside that job. For instance, if you work regular hours in a school you must arrange to pay the tax you owe on any work you do outside school (e.g. private teaching, gigs etc.). Although it is a serious responsibility, this is a relatively simple process. With just a little daily organisation, it can be handled with very little disruption.

Paying your tax

If you earn any money outside a regular salaried job, you must register yourself as self-employed with HMRC. For more information go to www.businesslink.gov.uk/taxhelp. You can also call the Newly Self-Employed Helpline on 0845 915 4515. There is also a leaflet here: http://hmrc.gov.uk/leaflets/se1.pdf.

HMRC will ask you about the nature of your work, and take your address and contact details. They will also ask you to set up a direct debit for National Insurance contributions – the exact amount depends on how much you earn, but the payments are made monthly.

At the end of each tax year (which runs from April to March), HMRC will contact you and tell you to complete a self-assessment form (a tax return), which you can do online. This tells them how much you have earned during the appropriate tax year and enables them to calculate what you owe. You also use the form to record any expenses you have incurred while doing your self-employed work. These are deducted from your total earnings and you only pay tax on the remainder.

You must complete the form and pay the tax you owe by 31 January following each tax year (i.e. January 2014 for the 2012–13 year). There is a £100 penalty for late payment, with further penalties and interest charged the longer you delay. 

What expenses can I claim?

Basically, anything you spend in your job as a self-employed musician can be deducted from your total earnings. You don’t have to declare every item individually on your tax return, you can combine them together in one amount. But you should keep receipts for everything you claim so you can back it up with evidence.

The main items include:

◆ Travel: rail tickets etc.

◆ Car expenses: petrol, maintenance, insurance etc. – keep a record of mileage clocked up for work and claim a percentage of the total you spend on your car based on that mileage

◆ Overnight accommodation: hotel bills, evening meals

◆ Clothing: only items used specifically for your work (e.g. tails)

◆ Household bills and rent: you are allowed to offset a percentage, depending how much you use your house for work, how many other people are living there

◆ Instruments, plus repairs and maintenance

◆ Instrument insurance

◆ Sheet music

◆ Publicity materials

◆ Concert tickets and subscriptions to trade publications and organisations

◆ Professional fees: e.g. accountant, diary service.

Day-to-day management

Try keeping a spreadsheet of income and expenditure (go on an Excel course if need be; you can use it to help manage your day-to-day cashflow too). Better still, keep a detailed order book: a record of gigs and other engagements, what you were paid, whether you have been paid, whether you needed to send an invoice and so on. Also, remember to keep your receipts in order and don’t throw them away. HMRC may want to look into your tax return after you have filed it.

You need to ensure you have enough to pay your tax bill; if your earnings are low, a demand for even a couple of hundred pounds can come as a shock. (Use an online tax calculator to give you an idea of how much you will need to pay.) One idea is to put aside a percentage of each fee you are paid into a separate account.

Ask the accountant

I spoke to Jane MacArthur of Amati UK Ltd (www.amati.co.uk), an accountancy firm specialising in musicians, and asked a few key questions about why you might want to employ an accountant to help with tax returns. 

When do I need an accountant?

From the start! I took on a client for 2010-11 who had done his own for 2009-10, and in a quick review I saw several errors and ways to save a significant amount of tax. He ended up paying an extra fee for me to redo it, but received a four-figure tax refund which far exceeded the fee. I do not believe I have seen anyone complete their own return with everything they can claim without making mistakes.

What simple tips can you give that make life easier when it comes to doing my tax?

Do your record keeping as you go along! We all get busy, but sit down once a month or at least once a quarter, and keep track of your income and outgoings. Having the last three months in recent memory makes it far quicker and easier than looking back 15 months after the event, by which time paperwork is often lost or missing.

What are the common pitfalls or traps?

The biggest common problem is people burying their head in the sand and hoping it will go away. So many clients say, ‘I feel so much better now I’ve given it all to you!’, and so much relief to get things sorted out, it causes a lot of people a lot more stress than it needs to. Don’t build it up and think of it as a huge challenge. Basically, you only need to keep track of your income and expenses. If you get into the habit of tidying up your records quickly after the year end in May or June, you can file your return early, and have six months to save for any surprising January bill.

Filing early also means that the enquiry window on your return closes earlier, as HMRC now only have 12 months from your filing date to enquire into the return – I suspect they are fully aware that the people who file early tend to have more accurate returns.

Will things be complicated if I buy/sell an instrument?

The Annual Investment Allowance allows you to claim the full cost of any asset purchased, in the tax year you buy it, for quicker tax relief (up to a maximum of £100,000 per year). If you sell an instrument, any amount previously claimed can be clawed back by HMRC as a balancing charge, up to the value you sell it for or the amount you previously claimed, whichever is smaller. These allowances are intended for large value equipment which will be used for several years in your business and end up having nil value. However, if you buy an instrument as an investment and have an expectation that the value will rise, it may not be appropriate to claim allowances.

Invoicing

This is basically a bill from you to a client that details the goods and services you have supplied them. It also allows them to keep up-to-date records of what they have spent their money on. That is why it is usually (but not always) bigger organisations, or organisations with finance and payroll departments, that ask for them.

You can make one up yourself – there is no official form or format – but it should contain: your name (or business name); address and postcode; contact numbers; email address; an invoice number (a unique number identifying that invoice); invoice date; name and address of client; a list of services or goods you have provided, plus a price per item; amount of VAT added (if appropriate); total amount due; your bank details (if the payment is to be made by BACS transfer) as well as the name that cheques should be made payable to.

Contracts and negotiations

The Musicians’ Union (www.musiciansunion.org.uk) is strong in its advice to members that they should get some kind of written confirmation of all engagements. Better still, that they should use one of its standard live contracts (downloadable from the members only part of the MU website). A similar service is provided by the Incorporated Society of Musicians (www.ism.org).

This advice is particularly relevant if you are performing for businesses/individuals who work outside the music profession (e.g. weddings, corporate functions and so on). Don’t be worried about frightening off potential clients: they may well be unfamiliar with booking musicians; knowing exactly what you are providing them with will give them reassurance. Both the MU and ISM provide a legal service to help their members to recover unpaid fees, and the MU publishes a list of promoters that musicians should be wary of (its ‘Ask Us First’ service). These tend to be less well-known promoters, or businesses/individuals working generally outside the music profession.

Fortunately, most music organisations are reliable – but not all, so do be wary and try to get at least an email confirmation including details of the gig. (It isn’t really usual to send contracts for one-off dates with small organisations like choral societies and local orchestras.)

Check when you will get paid (on the day or later) and be prepared: there will be occasions where payment is late, so it’s worth having wording for a simple chasing email drafted ready to send. Better to send this in the first instance, and try a polite phone call or two, before bringing in the MU’s heavy artillery.

VAT

If you earn over a certain amount (currently £77,000, but the figure can change from year to year depending on the Chancellor of the Exchequer’s budget), you are required to register to pay VAT. Basically, this means you need to charge the people who pay you an extra percentage, but you can also claim back the VAT you pay for any goods or services you buy as part of your business. There is more information on the HMRC website: www.hmrc.gov.uk/vat/start/register.