In the United Kingdom, millions of individuals and businesses are required to complete and submit self-assessment tax returns to Her Majesty’s Revenue and Customs (HMRC). This process is critical to fulfilling one’s tax obligations and understanding the intricacies of self-assessment can be the key to avoiding penalties and ensuring financial compliance.
What is a self-assessment tax return?
Definition and purpose
A self-assessment tax return is a document that individuals and businesses submit to HMRC to declare their income, expenses, and other relevant financial information for a specific tax year, which runs from 6th April to 5th April the following year.
The primary purpose of self-assessment is to calculate one’s tax liability accurately, allowing taxpayers to pay the correct amount of tax, claim any applicable deductions and reliefs, and maintain a transparent relationship with HMRC.
Differences between self-assessment and PAYE (Pay As You Earn)
While both self-assessment and PAYE are methods of collecting income tax in the UK, there are several key differences between the two systems:
- Who it applies to: Self-assessment is primarily aimed at individuals and businesses with income not subject to PAYE, such as self-employed persons, company directors, or those with rental income. In contrast, PAYE is designed for employees whose employer automatically deducts income tax and National Insurance contributions from their wages.
- Tax calculation and payment: With self-assessment, taxpayers are responsible for calculating their tax liability and making the required payments to HMRC. In the PAYE system, the employer calculates and remits the tax on behalf of the employee.
- Reporting frequency: Self-assessment tax returns are typically submitted annually, while PAYE deductions occur every time an employee is paid (e.g., weekly or monthly).
- Record-keeping: Self-assessment taxpayers are responsible for maintaining accurate records of their income and expenses to support their tax returns. PAYE taxpayers usually do not need to keep such records, as their employer manages the tax deductions.
Importance of understanding and completing self-assessment tax returns
Understanding and completing self-assessment tax returns is crucial for several reasons:
- Legal obligation: Individuals and businesses who meet certain criteria, such as being self-employed, receiving rental income, or earning a high income, are legally required to submit a self-assessment tax return. Failure to do so can result in penalties, fines, and potential legal repercussions.
- Accurate tax calculations: By completing a self-assessment tax return, taxpayers can ensure that they are paying the correct amount of tax based on their income and expenses. This process can help taxpayers avoid overpaying or underpaying taxes, both of which can lead to financial complications.
- Claiming deductions and reliefs: Self-assessment allows taxpayers to claim various deductions and tax reliefs, which can significantly reduce their tax liability. Understanding the available deductions and accurately reporting them on the tax return can result in substantial financial savings.
- Financial planning and management: Completing a self-assessment tax return requires individuals and businesses to maintain accurate financial records, which can lead to better financial management and planning.
Who needs to complete a self-assessment tax return?
Individuals and businesses that meet any of the following criteria must complete a self-assessment tax return:
- Self-employed individuals with an annual income above £1,000.
- Company directors, depending on their income level.
- Individuals with an annual income above £100,000.
- Individuals earning an income of £ 1000 or more from property rentals.
- Individuals with an annual income above £50,000 and claiming Child Benefits.
- Individuals receiving a certain amount of income from savings, investments, or dividends that are not taxed at source.
- Individuals with overseas income.
- Individuals who owe capital gains tax due to the sale of assets. This depends on the gain amount.
- Trustees, executors, or administrators of an estate.
For more information on Who needs to submit a self-assessment tax return, please read our article: When do you need to complete a self-assessment tax return?
Registering for self-assessment
When to register
Registering for self-assessment as soon as you meet the criteria that require completing a tax return is essential. This may include starting a business as a sole trader, becoming a partner in a partnership, receiving rental income, or having a high-income level. Ideally, you should register as soon as possible after the end of the tax year in which you first meet these requirements, but no later than 5 October in the following tax year. Registering early ensures you have ample time to prepare and submit your tax return before the deadline.
Registration process
Registering for an online account
If you’re registering for the first time, you’ll need to sign up for HMRC online services through HMRC’s login page. Click on the green “Sign-in” button and then on “Create sign in details” to create a user ID, also called the government gateway ID, on the next screen. Please enter your email address and the subsequent code sent to it by HMRC to confirm your email address. You will then be issued a government gateway ID, a string of numbers. Once logged in, you can register for self-assessment and receive a unique taxpayer reference (UTR) number. This 10-digit number is issued by HMRC and is necessary for filing your tax return. If you are registering as a sole trader or a partner in a partnership, you can apply for a UTR online via the HMRC website or by completing the appropriate form (CWF1 for sole traders or SA401 for partners). Once your application is processed, HMRC will send you a UTR by post, which may take up to 10 working days (21 working days if you’re abroad). You will need this to send your return.
Deadlines for registration
To avoid penalties, being aware of the deadlines associated with registering for self-assessment is crucial. The critical deadlines to remember are:
- 5th October – Register for self-assessment by this date in the tax year following the one in which you first met the criteria requiring you to submit a tax return.
- 31st January – Submit your online self-assessment tax return and pay any tax due for the previous tax year.
- 31st October – If you choose to submit a paper self-assessment tax return, it must be submitted by this date.
By understanding when to register, the registration process, and the relevant deadlines, you can ensure a smooth and hassle-free experience when dealing with self-assessment tax returns.
Completing your self-assessment tax return
What you’ll need to prepare
Personal information
Before starting your self-assessment tax return, gather the following personal information:
- National Insurance number
- Unique Taxpayer Reference (UTR) number
- Government Gateway login details (for online submissions)
Financial records
You’ll need to compile relevant financial records, which may include the following:
- P60: End of Year Certificate, if you have employment income
- P11D: Benefits and Expenses, if applicable
- Records of self-employment income (e.g., invoices, bank statements)
- Records of rental income and associated expenses
- Interest, dividends, and investment income statements
- Pension contributions and pension income
- Records of any other income sources
Expenses and deductions
Gather documentation for any allowable expenses and deductions, such as:
- Work-related expenses (e.g., equipment, materials, marketing costs)
- Home office expenses (e.g., rent, utility bills, insurance)
- Travel expenses (e.g., mileage, public transport costs)
- Professional fees (e.g., accountancy services, professional memberships)
- Charitable donations
Online vs paper submission
You can submit your self-assessment tax return either online or via paper. Online submission is recommended, as it offers several advantages:
- The extended deadline (31st January, compared to 31st October for paper) gives you three extra months
- Saves progress for later. This is especially useful if you’re missing some information and don’t have to start all over again when you revisit the page
- Instant confirmation of receipt by HMRC. If you submit your return by post, make sure to do it via ‘recorded delivery’ or registered post, so you have recourse in case it goes missing en route to HMRC
- Faster processing time
- Prevention of some mistakes. The online HMRC system points out some errors, which is especially useful for avoiding HMRC penalties for making mistakes on your tax return.
- Automatic calculation of tax liability
- Access to online help and guidance
How to complete and file your self-assessment tax return
You can complete and file your tax return by post or online. To do this, you will need to enter details of your income and expenses. You can do this yourself or hire a tax adviser or an accountant to do this on your behalf. Depending on your situation, it may be best to seek professional help, as a professional accountant may be able to claim allowable expenses you’re unaware of and reduce your tax liability. This will probably save you more money than the fees of a competent accountant, which is a tax-deductible expense anyway. For more information on this, please refer to our article: How do you complete and file your self-assessment tax return?
Common mistakes to avoid
To minimise errors and potential penalties, avoid these common mistakes:
- Missing deadlines: Register and submit your tax return on time to avoid penalties.
- Inaccurate income reporting: Double-check income records to ensure accuracy.
- Under-claiming expenses: Familiarise yourself with allowable expenses to maximise deductions.
- Poor record-keeping: Maintain organised financial records for easier tax return completion and potential HMRC inquiries.
- Not seeking help: If you’re unsure about any aspect of your tax return, consult a professional accountant or tax advisor.
By preparing your records, understanding the submission process, and following a step-by-step approach, you can complete your self-assessment tax return accurately and confidently while avoiding common mistakes.
Income and expenses in self-assessment tax returns
Income sources: Report all income sources in the relevant sections, such as employment, self-employment, rental income, investments, overseas income, and others.
Allowable expenses and deductions: Claim any allowable expenses and deductions in the corresponding sections of the form. It is crucial to claim all business-related costs to reduce your tax bill. These include purchasing goods for resale, rent, rates, repairs, insurance, utility bills, interest paid on business loans, lease payments on machinery and vehicles used for business, accountancy fees, etc. The following are different types of expenses you can claim.
Tax Calculation and Payment
How Your Tax is Calculated
Your Self-Assessment tax bill consists of Income Tax and, where applicable, National Insurance Contributions. There are also tax reliefs and allowances available to you that you should be aware of. Details of these are given below.
Income Tax Bands and Rates
In the UK, income tax is calculated based on a progressive system, with different rates applied to different portions of your income. The tax bands and rates for the current tax year are as follows:
- Personal Allowance: £0 to £12,570 – 0% tax rate (tax-free)
- Basic Rate: £12,571 to £50,270 – 20% tax rate
- Higher Rate: £50,271 to £150,000 – 40% tax rate
- Additional Rate: Over £150,000 – 45% tax rate
Your tax liability is determined by applying these rates to your taxable income, which is your total income minus any allowable deductions and reliefs.
National Insurance Contributions
In addition to income tax, most individuals are required to pay National Insurance contributions. These contributions are calculated as a percentage of your earnings and are subject to different rates and thresholds depending on your employment status (e.g., employed, self-employed, voluntary contributions).
Tax Reliefs and Allowances
Various tax reliefs and allowances can reduce your taxable income or tax liability. Some common examples include:
- Personal Allowance: A tax-free amount you can earn before paying income tax.
- Marriage Allowance: A transferable portion of the Personal Allowance for married couples or civil partners.
- Pension contributions: Tax relief on qualifying pension contributions.
- Gift Aid: Tax relief on charitable donations made to eligible organisations.
Paying your tax bill
Once you know the amount of tax you owe, make the necessary payments:
- Payment methods: Choose from various options, such as Direct Debit, online or telephone banking, debit or credit card, or payment at a bank or building society.
Payment deadlines
- Payment deadlines: Remember the deadlines for payments on account (31st January and 31st July) and the balancing payment (31st January following the end of the tax year).
- Late payment penalties: Be aware that late payments may result in penalties, including interest charges and surcharges.
Record-Keeping and Tax Planning
Importance of Good Record-Keeping
Good record-keeping is essential for self-employed individuals, as it helps to:
- Ensure accurate tax returns: Well-organised records make it easier to calculate income and expenses accurately, reducing the likelihood of errors on your tax return.
- Avoid penalties: Inaccurate or incomplete tax returns may result in penalties from HMRC. Proper record-keeping helps avoid such issues.
- Monitor business performance: Maintaining accurate records enables you to evaluate your business’s financial health, identify trends, and make informed decisions.
- Prepare for HMRC inquiries: HMRC may request supporting documentation for your tax return. Having well-organised records ensures you can provide the required information promptly.
Recommended Documents and Records to Keep
To maintain effective records, self-employed individuals should keep the following:
- Invoices: Maintain copies of all issued invoices, including details of the work performed, dates, and amounts charged.
- Expense receipts: Retain receipts for all business expenses, such as equipment, materials, and travel costs.
- Bank statements: Keep copies of all bank statements for accounts used for business transactions.
- Rental income and expenses: Maintain records of rental income received and associated property expenses if you have rental properties.
- Investment statements: Retain statements for any interest, dividends, or investment income received.
- Mileage logs: Keep a record of all business-related travel, including dates, destinations, and mileage.
- Payroll records: If you have employees, maintain records of wages, taxes, and National Insurance contributions.
Tax planning strategies for self-employed individuals
Effective tax planning strategies can help self-employed individuals minimise their tax liability and optimise their financial situation. Consider the following:
- Utilise available allowances and reliefs: Familiarise yourself with tax allowances and reliefs, such as personal allowance, trading allowance, and pension contributions, and claim them where applicable.
- Deduct allowable expenses: To reduce your taxable income, ensure you claim all allowable business expenses.
- Manage cash flow: Plan your business expenses and income-generating activities to maximise tax benefits. For example, delay income or accelerate payments to optimise your tax position for a particular tax year.
- Contribute to a pension scheme: Pension contributions are tax-deductible, effectively reducing your tax liability while saving for retirement.
- Consider incorporating: Depending on your circumstances, incorporating your business may offer tax advantages, such as lower corporation tax rates and more tax-planning opportunities.
Benefits of Using Accounting Software or Hiring a Professional Accountant
Using accounting software or hiring a professional accountant can provide several benefits, including:
- Time savings: Automating record-keeping tasks or delegating them to a professional allows you to focus on running your business.
- Accuracy: Accounting software and professional accountants can help ensure accurate record-keeping and tax return preparation, reducing the risk of errors and penalties.
- Expert advice: A professional accountant can offer personalised tax planning advice and strategies to optimise your financial situation.
- Compliance: Using accounting software or an accountant, you can stay up-to-date with changing tax laws and regulations, ensuring ongoing compliance.
Effective record-keeping and tax planning are crucial for self-employed individuals. You can optimise your tax matters by keeping accurate records, implementing tax planning strategies, and considering using accounting software or professional accountants.
Frequently Asked Questions (FAQs) about Self-Assessment Tax Returns
Navigating the self-assessment tax return process can be challenging for many individuals. To help you better understand your obligations and options, we’ve compiled answers to some of the most frequently asked questions.
Can I submit a late tax return?
While submitting your self-assessment tax return by the deadline (31st January for online submissions) is always best, you can still submit a late tax return. However, late submissions may result in penalties from HMRC. These penalties are as follows:
- 1 day late: £100 automatic fixed penalty
- Up to 3 months late: £10 per day, up to a maximum of £900
- 6 months late: An additional £300 or 5% of the tax due, whichever is higher
- 12 months late: A further £300 or 5% of the tax due, whichever is higher
These penalties are in addition to each other, so after 12 months, the minimum penalty for late filing will be upwards of £1600.
In some cases, HMRC may consider “reasonable excuses” for late submissions, such as serious illness, bereavement, or natural disasters. If you believe you have a reasonable excuse, contact HMRC as soon as possible to discuss your situation.
What if I make a mistake on my tax return?
If you discover a mistake on your tax return, it’s essential to correct it promptly. Small errors, such as mathematical mistakes or incorrect figures, will usually be corrected by HMRC during their review of your tax return. However, for more significant errors or omissions, you should take action to rectify the mistake.
Can I amend a submitted tax return?
Yes, you can amend a submitted tax return within 12 months from the submission deadline (i.e., 31st January of the following year). To change an online tax return, log in to your HMRC online account and choose the option to amend your return. For paper tax returns, you’ll need to download and complete a new tax return form and clearly indicate that it’s an amended return.
If the amendment results in additional tax owed, you should pay the extra amount as soon as possible to avoid interest and penalties. If you’re due a tax refund, HMRC will usually issue the refund within a few weeks of receiving your amended return.
What if I cannot afford to pay my tax bill?
If you’re unable to pay your tax bill by the deadline, it’s crucial to contact HMRC as soon as possible. In some cases, HMRC may agree to a “Time to Pay” arrangement, allowing you to spread your tax payments over a more extended period. This arrangement is subject to approval and typically requires you to demonstrate that you’ve made a genuine effort to meet your tax obligations but are experiencing financial difficulties.
To set up a “Time to Pay” arrangement, contact the HMRC Payment Support Service or discuss your situation with an HMRC advisor.
Conclusion
In conclusion, a self-assessment return is a tax form that needs to be completed by taxpayers who are either self-employed or have other sources of income outside of their employment. The form requires taxpayers to report their income and claim relevant allowances and reliefs. Once the form has been completed and submitted to HM Revenue and Customs (HMRC), they will calculate the amount of tax owed or any refund due. Filing a self-assessment return accurately and on time is essential to avoid any penalties or interest charges. It’s worth noting that self-assessment returns can be complex, particularly for those with multiple sources of income or complicated financial affairs. Therefore, seeking the advice of an accountant or tax adviser is recommended to ensure that the return is filled in correctly and to minimise the risk of errors or omissions. An experienced professional can also identify any potential tax savings and ensure that all relevant allowances and deductions are claimed.
