Recording Your Income and Paying Tax

Because many people begin their writing careers by writing as a hobby, it can be a bit disconcerting to realise that, when you start earning, you're suddenly responsible for tax.

The money you earn from writing is an income like any other, but unless you've been self-employed before you'll find that the taxes you pay are a new thing.

You'll have to learn how to keep your own accounts and correctly assess the amount you owe. Of course, there is always the option of hiring an accountant, but that can be expensive and isn't strictly necessary. There are lots of resources available to help you cope with tax by yourself.

Basic Accounting

Because you can study it at a professional level, people tend to think of accounting as a specialist skill, but at the level you need, it really isn't very complicated. Keeping your own accounts basically means that you need to keep a record of all your business incomings and outgoings. Every time you earn money from writing, make a note of it in your records. Keep any pay slips or other related paperwork which you receive.

If you run your writing business from home, you can declare a portion of your household bills - your heating, lighting and electricity costs and your phone bills (including what you pay for your mobile) - as business expenses. Equipment which you have to buy for your writing business, like stationary, stamps and computer parts, can also be listed in this category.

Also when you travel to do a specific job (such as researching an article), your travel costs can count as an expense, although daily travel to the same place can't be written off in this way. At the end of the year, you can subtract the cost of your expenses from the amount you have earned in order to reduce the amount of tax you're eligible to pay.

Paying Your Taxes

Because working independently as a writer qualifies you as a sole trader, your earnings will be processed at the end of each financial year through your income tax assessment form. Just telephone the tax office when you start to receive pay for your writing work, and everything you need will be sent to you.

You'll have several months in which to fill out your tax forms (which can be done on paper or online), though it's important not to be late with them, as this can be punished with fines even if you don't owe any tax.

If you earn less than the annual tax-free allowance (£5,435 for 2008-2009; soon to rise), you won't need to pay any tax, although you will still need to fill out your annual declaration. If you expect your earnings to be higher than this, you can phone the tax office to start paying in monthly instalments so that you don't have a big bill to deal with at the end of the year. If you pay too much tax, you'll receive a cheque once your tax return has been processed.

As a self employed writer, you'll also be required to pay your own National Insurance contributions. The tax office will contact you to explain how you should go about this. It's simple to do and amounts to only £2.50 per week.

Reducing Your Taxes

Depending on the type of writing you do, you may qualify as a creator of literary or artistic works. The tax office can advise you about this. If you fall into this category, you will have the option of averaging your earnings across a three year period. This can help to mitigate the ups and downs of a writer's life.

It means that if you spend a lot of your time one year working on a book but you don't sell it until the next year and don't receive royalties until the year after that, the tax system will take proper account of the fact that those royalties represent more than one year's worth of income. Averaging is easy to arrange and doesn't require you to fill in any extra forms.

Another way to account for variable earnings and reduce your tax bill is to keep careful account of any period in which you make a loss. It's surprisingly easy to make an overall loss in your first year. If, say, you pay for a brand new computer system complete with fax machine, printer and scanner, and if you pay for website design, this, in addition to more ordinary expenses, could easily add up to more than you'll earn as a beginner.

In this case, you can carry your loss over and declare it against your earnings for the following year, making sure you don't lose out.