For most self-employed people, their self-assessment tax return is a necessary evil which they will need to understand and register for early on in their business' inception to avoid penalties.
What is Self Assessment?
For employed people, tax is something which is automatically deducted from their wages before they even see them. However, for those who are self employed, tax is required to be reported and paid via a self assessment tax return.
You need to fill out and return a self assessment tax return if:
- You are self employed as a ‘sole trader’, and earned more than £1,000 in the previous tax year, or,
- You are a partner in a business partnership
You may also need to fill out a self assessment tax return if you are employed, but also make some of your income from:
- Renting out a property
- Savings, investments and dividends
- Tips and commission
- Money earned abroad (from a rental property, or example)
- Bank interest
Those who only receive income from a wage or pension do not usually need to fill out a self assessment tax return.
When does your tax return need to be filed?
With the UK tax year running from 6 April to 5 April the following year, tax return deadlines as follows:
- 31 October for paper returns
- 31 January for online submissions
For the tax year 2018/19, postal submissions will need to be returned by 31 October 2019, and online returns by 31 January 2020.
For newer businesses, it makes sense to make yourself comfortable with the online process, as the government is trying to phase out paper returns as part of the Making Tax Digital initiative. If you can get your accounts entirely online before paper records become altogether obsolete then you will be saving yourself time and energy in the future.
How to register for self assessment
To register for self assessment you first need a Government Gateway account, which can be set up online. The first thing you need to do is register with HMRC for self assessment, after which you will be given a 10-digit Unique Taxpayer Reference (UTR), which you will need to use on all correspondence as well as on your tax return. HMRC will also send out a user ID and password so that you can access the system.
Be mindful of the deadlines for filing your tax return as HMRC only send out user IDs by post and they can take a few weeks to arrive. If you miss the self assessment deadline then you will get an instant late-filing penalty of £100, and this amount continues to rise if the payment isn’t made promptly.
How to fill out your self assessment tax return
Start as early as you can
It makes sense to start getting everything together ready to fill out your tax return almost as soon as the last one has been filed. There are stiff penalties for being late with your return, but no consequences if you file early. If you don’t have an accountant, get accounting software like Xero which can help you keep track of your accounts and quickly take this information to your tax return when you need it.
Keep key documents together
Have a physical folder as well as a digital version, which has copies of all of your key documents, so that you can quickly access them as and when you need.
You are likely to require:
- Your UTR number
- User ID and password
- National Insurance number
- Personal details (address, date of birth, previous names etc)
- P60 (if you are employed)
- P11D (if you get one)
- P45 (if you have switched jobs during the tax year)
- PAYE notice of coding (if relevant)
- Annual payment statement for your student loan
- Bills and receipts (for claiming expenses)
You are required by law to keep your records for a minimum of six years, so don’t throw anything away once you have completed your tax return, however insignificant it may seem. The time limit for HMRC to launch an investigation if they suspect fraud is 20 years, so many businesses keep their paperwork for at least this long.
You may have to pay extra for your first payment
‘Payment on account’ means that you are required to pay some tax in advance of your next bill, as a way to spread the cost throughout the year and make it more affordable. Over time, payment on account does work out much more affordably, but can come as a nasty shock for your first tax bill. Not only will you need to pay your full tax bill for the previous bill, but you will also need to pay 50% towards the next year (calculated as an estimate according to your current bill).
The only exceptions to this are if your previous year’s tax bill is less than £1,000, or if you’ve already paid more than 80% of the tax owed through your tax code or other deductions.
To avoid this being a problem, make sure that your accounts are always up to date, and keep track of what tax you are likely to owe at the end of the tax year, so that you can be prepared.
Don’t forget your expenses
There are plenty of things that you can claim for, to make your tax bill more affordable. Expenses are things which you have already paid out for and have receipts for, the cost of which you can take off of the amount of tax you owe. You can claim for things like tools and equipment, business mileage and even a proportion of your utilities if you work from home. Make sure you keep a record and proof of all of these expenses as they can add up over time.
Try to store all of your receipts digitally so that they are all in one place, making it easier for you to look back over your records and write everything down. There are mobile apps like SimpleTax which allow you to take a picture of your receipt and download it direct to your tax return, which makes the process quick and simple.
Many small businesses attempt to tackle their tax affairs themselves, and this does make sense in some circumstances. If you are diligent, have good attention to detail, and can keep to deadlines then there is every chance you can successfully keep on top of all your payment and paperwork obligations.
Retaining the services of an accountant firm such as TFMC will cost your business, but clients are frequently happily taken aback when the learn how little this amount can be. As well as saving you time with onerous filing obligations, we can advise on how you can save tax by structuring your affairs more efficiently. And, of course, we will always be there to fight your corner if your company comes under HMRC’s cross hairs!
Give us a ring on 0800 470 4820 or email [email protected] to find out about our cost effective accountancy services.