HM Revenue and Customs (HMRC) use the Self Assessment system to collect income tax. While the idea of submitting a tax return can be daunting, Self Assessment is normally more straightforward than it seems (once you get past the terminology).
Who needs to complete a Self Assessment tax return?
In most cases, anyone who receives untaxed income will need to submit a Self Assessment tax return to tell HMRC about it.
If you earn money from an employer you’re normally taxed through PAYE, but not all income is taxed at source. For example, the payment a self-employed person receives from a customer usually hasn’t been taxed when it gets to them. This means that the self-employed person must report this income themselves, and pay the right amount of tax on it.
There might be other reasons that you receive untaxed income too, such as:
- You’re in a business partnership, and earn a share of the profits
- Money from foreign income
- Through savings, investments, or dividends
- From renting out a property
- From tips or commission
Use the online tool to check whether you need to complete a Self Assessment tax return.
How do I register for Self Assessment?
If you do need to complete a tax return, you can register for Self Assessment online , or you may be able to register by post in some circumstances.
The process is slightly different, depending on whether you’re self-employed, in a partnership, or if you’re not actually self-employed.
The first step is creating a Government Gateway user ID number. This is not the end of the process! Your next job is to create a business tax account which you then use to register for Self Assessment, and then link everything together to your gateway account.
Once you register, HMRC will send out a Unique Taxpayer Reference number. You’ll need this to complete your Self Assessment tax return. Keep it safe!
On a side note…
If you’re the director and shareholder of a limited company, you’ll already have a UTR number for the company. This is separate to the UTR you’ll use for Self Assessment, so make sure you don’t mix them up.
What bookkeeping records do I need?
It’s essential that all of your records are well organised, especially when it’s time to submit your tax return (and even more so with Making Tax Digital for Income Tax Self Assessment on the horizon!).
For most businesses, this means keeping a record of sales and business income, purchases, and other business expenses. Things like invoices, receipts, records of sales, and information about staff wages all need to be recorded in your bookkeeping.
Depending on your business, there might be other records that you need, too.
What other records or documents might you need to keep?
If you’re both employed and self-employed, for example, you’ll need to keep your P60 so that you can include information about your salary, and how much tax you’ve paid on it through PAYE.
Another classic example is if you’re planning on claiming for vehicle costs using a flat rate for mileage, in which case you’ll need details of each journey in order to work out your mileage.
How is my Self Assessment tax bill calculated?
When you complete a Self Assessment tax return, rather than paying tax on all of your income, you only pay tax on your profits. In most cases, the money you spend running your business is an expense that you can claim to reduce your tax bill.
Things such as stationery, travel costs, staff salaries, or stock and raw materials can all be claimed. It’s a bit confusing because ‘claiming expenses’ makes it seem like you’ll get the money back as a refund.
The reality is that you’re claiming tax relief against them. Basically, the cost of your allowable expenses is taken off your total income to calculate your profits. Your tax bill is then based on your profits.
Sadly, you can’t claim personal expenses as business expenses! You have to be able to show that any expense you claim for was incurred wholly as a result of your business.
The Trading Allowance
If you’re not already registered, and your total self-employed income is less that £1,000 in a tax year, you won’t need to register for Self Assessment or pay tax on it. If you are already registered, you’ll still need to submit a return.
You’ll then have the choice of either claiming the allowance, or claiming your expenses – not both. The good news is that it’s up to you which method you use to claim – so go for the one that reduces your tax bill the most!
Important dates to remember
The most important dates to remember are when you need to register for Self Assessment, when you need to submit your return, and when you need to pay your bill.
The deadline for registering
The deadline for registering for Self Assessment is 5th October, after the end of the tax year in which you start earning untaxed income.
The deadlines for submitting a tax return
The deadline for submitting a Self Assessment tax return is January 31st, after the end of the tax year. For example, for a tax return for income earned in the tax year ending 5th April 2022, you’ll need to submit by 31st January 2023.
While this is the deadline, there are good reasons for submitting your tax return well ahead of time. One thing is that if you’re due a tax rebate, you’ll get it sooner if you submit your tax return early. The other major benefit is that it will give you more time to plan how to pay the bill.
It also gives you more time to make sure everything is right, and that you’re not missing out on any expenses. So leave yourself plenty of time!
The deadline for paying the bill
The deadline for paying your tax bill is the same as the deadline for submission. It’s 31st January after the end of the tax year. If you leave it late to submit your Self Assessment return, you’ll have to pay your bill very quickly after you’ve submitted it.
What are the penalties if you miss the submission or payment deadlines?
Unfortunately there are penalties for missing the deadline to submit your return or pay the bill. If your Self Assessment return is late, you’ll be given an automatic £100 penalty. This penalty increases according to how late you submit your return.
There are also separate penalties if you’re late paying your tax bill late, and you’ll be charged interest on late payments. Some penalties are given as a percentage of the tax you owe.
So, if you’re a whole year late for submitting your Self Assessment return, you can expect to be charged 15% of what you owe. Ouchie.
There are even penalties if you fail to register for Self Assessment in the first place, so always double check that you know the rules.
You can appeal against penalties if you have a good reason, but you’ll need to make sure it’s a very good reason indeed!
What about the government’s Making Tax Digital plan?
Making Tax Digital (MTD) is the government’s plan for improving the way that we all handle our taxes. From 6th April 2024, it’s being introduced for Income Tax Self Assessment. If you need to submit a tax return after this date, you’ll need to be compliant, keeping digital records and using software to submit your returns throughout the year.
While you can still carry on submitting an annual tax return in the same way until the changes come into effect, it might be a good idea to shift to using software now. Not only will you avoid a rush later on (and the panic that comes with it), but it’s also actually pretty helpful in other ways!
Learn more about the time-saving advantages of using accounting software, and register for your free Pandle account.