A guide to self-assessment tax returns for the 31 January deadline
Around 11.5 million people filed a self-assessment tax return in the UK last year, and if you’re one, read our guide to tax returns for the 31 January deadline.
Who needs to file?
However, sole traders and self-employed people earning more than £1,000, as well as those in business partnerships, need to file a return every year.
The following people may also need to file a return:
- Anyone earning untaxed income over a certain threshold, such as money from: renting out a property; tips or commission; income from savings; investments and dividends; foreign income
- People earning more than £50,000 who receive child benefit
- HMRC has developed a tool so people can check whether they need to send a return.
How to file
Once you know that you do need to send a return, the first thing to do is register for self-assessment with HMRC. You will receive a Unique Taxpayer Reference (UTR) in 10 working days.
Once you have your UTR, you need to sign up to file your tax return online. You’ll get an activation code in the post within seven working days of signing up.
During the year, keep a record of all your income, as well as anything you spend that is related to your business. Those expenses can then be deducted from your total income for the year, to calculate how much profit you have made, as you only need to pay tax on your profits.
Allowable expenses include:
- Office costs, such as stationery or phone bills
- Travel costs, such as fuel, parking, train or bus fares
- Things you buy to sell on, such as stock or raw materials
- The costs of your business premises. If you work from home, decide what proportion of your home you use for work, and you can claim that proportion of your bills as an allowable expense.
Do you need an accountant or bookkeeper?
Depending on your personal circumstances, it can be reasonably straightforward to do a tax return on your own.
Some people use an accountant or bookkeeper for their first year of self-assessment, in order to gain confidence in filing a return. Those with more complex situations may choose to use an accountant to ensure they file correctly.
For some people, the amount they save by using a bookkeeper more than pays their fees and cuts out a great deal of work and stress and gives you the assurance your return has been filed correctly.
Here are some areas freelancers need to take extra care in and issues you may need to note:
- If you are a higher-rate taxpayer, you can claim relief for pension contributions
- Spouses can transfer unused personal tax allowances
- PPI compensation is taxable
- Those earning over £50,000 could retain their right to Child Benefit by making higher pension contributions, or donations to charity with Gift Aid
- Only 50% of finance costs for residential properties earning rental income are now available for tax deduction
Using accounting software
The government’s Making Tax Digital scheme requires VAT-registered small businesses and sole traders to keep digital records and use software – such as FreeAgent and Xero, which are available through the Starling Marketplace – to submit their VAT returns. The scheme may be extended to cover income tax in April 2021.
Paying your tax return
It is important to ensure you save money during the year to pay your tax bill, particularly as the first payment is due by the 31st January when money can be tight.
The first year you pay your self-assessment tax bill, you will be paying tax on the previous year’s earnings, plus half that amount again. That will go towards next year’s tax bill and is known as a “payment on account”. The second payment on account is due on 31st July.
The idea is that in your second year of self-assessment, you will already have paid most of your tax on that year’s earnings by January 31st. Then you only need to pay any remaining tax for the previous tax year – known as a “balancing payment” – and the first “payment on account” for the following year.
Don’t leave it too late
Tax returns can be completed any time from 6th April until the deadline on 31st January, meaning freelancers have little excuse for scrambling to file minutes before the deadline. Filing late incurs penalty charges for every day. For more information or help with your return, please contact The Hollies Bookkeeping Services.