Self Assessment – a guide

Understanding Self Assessment in the UK for Self-Employed and Employees

Self-assessment in the UK might sound a bit intimidating at first, but once you get the hang of it, it’s quite manageable. Whether you’re self-employed or an employee, knowing how self-assessment works is crucial for keeping on the right side of the taxman and ensuring your finances are in order. Let’s break it down step by step.

What is Self Assessment?

Self-assessment is a system HM Revenue and Customs (HMRC) uses to collect Income Tax. It’s used mainly by self-employed people, but it’s also for anyone who has income that isn’t taxed at source (like savings, investments, rental income, and more). Essentially, you tell HMRC about your income and any expenses, and they calculate how much tax you owe.

Who Needs to Complete a Self Assessment Tax Return?

  • Self-employed individuals: If you earned more than £1,000 from self-employment in a tax year.
  • Company directors: If you earn money from dividends or have other untaxed income.
  • Landlords: If you make money from renting out property.
  • High earners: If you earn more than £100,000 a year.
  • Individuals with foreign income: If you have income from abroad.
  • Partners in a business: If you’re in a business partnership.
  • People claiming certain expenses or reliefs: If you’re claiming back money for expenses like charity donations.

Registering for Self Assessment

If you’re self-employed, you need to register with HMRC to let them know you need to complete a self-assessment. You should do this by 5th October following the end of the tax year in which you started trading. For example, if you started your business in July 2023, you need to register by 5th October 2024.

To register, you’ll need to set up a Government Gateway account if you don’t already have one. This is where you’ll manage all your tax affairs online. Once registered, HMRC will send you a Unique Taxpayer Reference (UTR) number. This is your personal tax ID and you’ll need it for your tax return.

get a Gateway account for self assessment

Completing the Tax Return

The tax year in the UK runs from 6th April to 5th April the following year. After the tax year ends, you have until 31st January of the next year to file your return online (or 31st October if you’re filing a paper return). Here’s what you need to do:

  1. Your Information: Collect all your financial information for the tax year. This includes:
    • Income from self-employment or employment.
    • Bank interest and investment income.
    • Rental income.
    • Any other income, such as state benefits or pensions.
    • Records of expenses related to your self-employment or rental property.
  2. Log In to Your Government Gateway Account: Use your UTR number to access your self-assessment form online.
  3. Fill Out the Tax Return: Follow the prompts to fill out each section. You’ll need to enter your income and expenses. HMRC’s system will calculate your tax bill as you go.
  4. Double-Check Your Information: Mistakes can be costly. Ensure all figures are accurate and you haven’t missed anything.
  5. Submit the Return: Once you’re happy with your return, submit it online. You’ll get an immediate acknowledgment that HMRC has received it.

Paying Your Tax Bill

After you’ve submitted your return, HMRC will tell you how much tax you owe. Payment is due by 31st January. There’s also a “payment on account” system for self-employed people, which means you might need to pay some of your next year’s tax bill in advance. These payments are due on 31st January and 31st July.

Deductions and Reliefs

One of the perks of self-assessment is that you can claim deductions and reliefs to reduce your tax bill. Here are some common ones:

  • Business Expenses: If you’re self-employed, you can deduct business expenses like travel, office supplies, and marketing costs. Make sure you keep detailed records and receipts.
  • Charitable Donations: You can claim tax relief on donations to registered charities.
  • Pension Contributions: Contributions to certain pension schemes can reduce your taxable income.
  • Marriage Allowance: If you’re married or in a civil partnership, you might be able to transfer some of your personal allowance to your partner.

Keeping Records

It’s essential to keep good records of your income and expenses. HMRC requires you to keep records for at least 5 years after the 31st January submission deadline. This includes:

  • Invoices and receipts
  • Bank statements
  • Payroll records if you employ anyone
  • Details of any other income you’ve received

Late Returns and Penalties

Missing the deadline for filing your return or paying your tax can result in penalties. Here’s a brief overview:

  • Late Filing: If you’re up to 3 months late, there’s a £100 penalty. After 3 months, additional daily penalties of £10 per day can apply (up to a maximum of £900).
  • Late Payment: Interest will be charged on any unpaid tax, and there can be further penalties if you’re significantly late.

Getting Help

If you find self-assessment confusing or you’re worried about making mistakes, there’s plenty of help available. HMRC offers guides and tutorials on their website, and they have a helpline you can call for advice. Many people also choose to hire an accountant to handle their tax affairs, which can be especially helpful if your finances are complex.

Common Questions

Q: Do I need to file a return if I’m employed and my tax is already deducted through PAYE?
A: If your only income is from your employment and it’s taxed through PAYE, you probably don’t need to file a self-assessment return. However, if you have additional income, such as rental income or investments, you will need to file a return.

Q: What if I make a mistake on my tax return?
A: If you realize you’ve made a mistake after submitting your return, you can usually correct it online. You have 12 months from the 31st January deadline to make amendments.

Q: Can I file my tax return on paper?
A: Yes, but the deadline is earlier – 31st October. Filing online is generally quicker and more straightforward.

Conclusion

Self-assessment might seem daunting, but it’s essentially about keeping track of your income and expenses and making sure you pay the right amount of tax. Stay organized, keep good records, and don’t hesitate to seek help if you need it. Once you’ve done it a couple of times, it becomes much easier and can even be a great way to keep on top of your finances. Happy filing!