If you’re new to the process of submitting a self-assessment tax return, it can be a complex and overwhelming task. This article will help you understand how to calculate your tax liability when submitting your self-assessment tax return – to allow you to pay the correct amount of tax to HMRC and avoid any potential penalties. It will cover the key concepts and steps involved in determining the tax you owe while providing helpful resources and tips for a smooth tax return process.
Overview of the Self-Assessment Tax Return
The self-assessment tax return is a system HM Revenue and Customs (HMRC) uses to collect income tax from individuals not taxed through the Pay As You Earn (PAYE) system. This includes self-employed individuals, company directors, individuals receiving rental income, and those with substantial investment income, among others.
You are required to submit a self-assessment tax return annually detailing your income, expenses, and any other relevant information to calculate your tax liability for the tax year. The tax year in the UK runs from the 6th of April to the 5th of April of the following year.
Registering for Self-Assessment
Before you can submit your tax return, you must register for self-assessment with HMRC. You can do this online via the government’s website. For more information on how to register, please read our article: A comprehensive guide to registering for self-assessment in the UK. Once successfully registered, you will receive a Unique Taxpayer Reference (UTR) number and be enrolled in HMRC’s online services, where you can submit your tax return.
Understanding the Tax Bands and Rates
You need to understand the tax bands and rates applicable to your income to calculate your tax liability. In the UK, there are three main tax bands:
- Personal Allowance: This is the tax-free income threshold, up to which you pay no income tax. For the 2022/2023 tax year, the personal allowance is set at £12,570.
- Basic Rate: This rate applies to taxable income between £12,571 and £50,270. The basic rate is 20%.
- Higher Rate: This rate applies to taxable income between £50,271 and £125,140. The higher rate is 40%.
- Additional Rate: This rate applies to taxable income over £125,140. The additional rate is 45%.
Note that these rates and bands are subject to change, so always refer to the latest information from HMRC.
Identifying Your Sources of Income
To determine your tax liability, you must first identify all sources of income you received during the tax year. This includes, but is not limited to:
- Employment income
- Self-employment income
- Rental income
- Interest on savings and investments
- Foreign Income
- Capital gains
Keep detailed records of your income and any expenses or reliefs that may reduce your tax liability. For more information, please read our article: When do you need to complete a self-assessment tax return?
Calculating Your Taxable Income
Once you have identified your sources of income, you must calculate your taxable income. This involves adding up all your sources of income and deducting any relevant allowances, deductions, and reliefs. Examples include:
- Personal allowance
- Trading allowance (if you’re self-employed)
- Property allowance (if you have rental income)
- Dividend allowance
- Personal savings allowance
- Marriage allowance
Remember to deduct any allowable expenses related to your income, such as business expenses for self-employed individuals or rental expenses for landlords.
Calculating Your Income Tax Liability
Now that you have calculated your taxable income, you can determine your income tax liability by applying the appropriate tax rates to your income within each tax band. For example, if your taxable income is £60,000:
- £12,570 is tax-free due to the Personal Allowance
- The next £37,700 (£50,270 – £12,570) is taxed at the Basic Rate of 20%, resulting in £7,540 in tax
- The remaining £9,730 (£60,000 – £50,270) is taxed at the Higher Rate of 40%, resulting in £3,892 in tax
Your total income tax liability would be £11,432 (£7,540 + £3,892).
Calculating National Insurance Contributions
In addition to income tax, you may also need to pay National Insurance Contributions (NICs) if you are self-employed or a company director. NICs are calculated as a percentage of your self-employment or directorship income, subject to certain thresholds and limits.
There are two main types of NICs for self-employed individuals:
- Class 2: A flat rate of £3.05 per week (for the 2022/2023 tax year) if your annual profits are £6,515 or more.
- Class 4: A percentage-based contribution to your annual profits. For the 2022/2023 tax year, Class 4 NICs are charged 9% on profits between £9,568 and £50,270 and 2% on profits above £50,270.
Company directors typically pay Class 1 NICs on their salary and bonuses, which their employer deducts through the PAYE system.
Factoring in Other Taxes and Deductions
Depending on your circumstances, you may also need to consider other taxes and deductions when calculating your tax liability. These may include:
Capital Gains Tax: This is a tax on the profit made from selling or disposing of assets, such as shares or property. Each individual has a yearly tax-free allowance for capital gains, called the Annual Exempt Amount (£12,300 for the 2022/2023 tax year). Gains above this threshold are subject to Capital Gains Tax at varying rates, depending on your income and the type of asset.
Dividend Tax: Dividends received from shares held in UK companies are subject to Dividend Tax. There is an annual Dividend Allowance (£2,000 for the 2022/2023 tax year) below which no tax is due. Dividends above this threshold are taxed at 7.5% for Basic Rate taxpayers, 32.5% for Higher Rate taxpayers, and 38.1% for Additional Rate taxpayers.
Student Loan Repayments: If you have a student loan, you may need to make repayments through your self-assessment tax return. The repayment amount is calculated as a percentage of your income above a certain threshold, depending on the type of loan and repayment plan.
For more information about self-assessment tax planning and calculations, please read our article: Mastering self-assessment tax returns: Your guide to accurate tax calculations and financial planning.
Submitting Your Self-Assessment Tax Return
Once you have calculated your tax liability, you can complete and submit your self-assessment tax return online through HMRC’s online services. You will need to provide details of your income, expenses, and any other relevant information, as well as your tax calculation. For more information on this, please read our article How do you complete and file a self-assessment tax return?
The deadline for submitting your online tax return and paying any tax owed is the 31st of January, following the end of the tax year. Penalties may apply for late submission or payment, so ensure you meet this deadline to avoid any unnecessary fines. For more information on deadlines and penalties, please read our article What are the self-assessment tax return deadlines?
What are balancing payments?
Once you’ve filled in your tax return, you’ll see your tax bill. If you file online, you can see it in the ‘view your calculation’ section before submission of the return and in the ‘final tax calculation’ 72 hours after submitting your return. You’ll receive the bill by post if you submit a paper return.
Your bill will include any balancing payment. A balancing payment is the amount of tax you owe for the tax year after taking into account any payments on account you have already made and other tax payments, such as PAYE deductions from employment. You may be entitled to a tax refund if you have overpaid your tax. Conversely, if you have underpaid, you will need to make a balancing payment to settle the outstanding tax liability.
Your balancing payment is due by the 31st of January, following the end of the tax year. For example, if you are submitting your tax return for the 2022/2023 tax year, your balancing payment will be due by the 31st of January, 2024.
What are Payments on Account?
Payments on account are advance payments towards your next tax year’s liability. They are required if your tax bill for the previous year was over £1,000, and less than 80% of your total tax liability was collected at source (e.g., through PAYE). Payments on account are calculated as 50% of your previous tax year’s liability and are due in two instalments:
- The first payment is due by the 31st of January, along with your balancing payment for the previous tax year.
- The second payment is due by the 31st of July.
For example, if your tax liability for the 2022/2023 tax year is £3,000, you will need to make two payments on account of £1,500 each for the 2023/2024 tax year. The first payment will be due by the 31st of January, 2024, and the second payment will be due by the 31st of July, 2024.
How to Check Payments on Account You Made Last Year?
To check the payments on account you made last year, you can do the following:
- Log in to your HMRC online account: Access your Personal Tax Account or Self-Assessment account on the HMRC website. From there, you can view your tax bill, payments on account, and other relevant information related to your self-assessment tax return.
- Review your bank statements: Check your bank statements for payments made to HMRC with the relevant transaction dates (31st of January and 31st of July). Ensure the amounts match the payments on account you were required to make.
- Contact HMRC: If you are unable to access your online account or find the relevant information on your bank statements, you can contact HMRC for assistance. They can provide details of your payments on account and help you verify if the correct amounts were paid.
Calculating your tax liability when submitting your self-assessment tax return can be complex. Still, with careful planning, organisation, and understanding of the UK tax system, you can accurately determine how much tax you owe. This article has covered the key steps and concepts to help you confidently navigate the tax return process. Remember to keep thorough records of your income and expenses, review the latest tax bands and rates each year, and submit your self-assessment tax return by the required deadline to avoid penalties. Lastly, feel free to seek help from HMRC or a tax professional if you have questions or concerns about your self-assessment tax return. The process may be complex, but with the right knowledge and resources, you can successfully calculate your tax liability and fulfil your obligations to HMRC.