Not only is it essential to comprehend and file your self-employed tax returns in the UK, but it can also help you avoid paying needless fines. It guarantees legal compliance while also enabling you to maximise tax deductions and reduce your tax obligations. If you are self-employed, you may find filing your taxes intimidating. There is no need to worry, as this guide will simplify the process for you.
First, let us discuss the definition of Self-Assessment. Then, we can move on to submitting it on time to avoid penalties.
What is Self-Assessment?
For self-employed individuals, the tax return process is called Self-Assessment.
To collect income tax from employees, HMRC uses the PAYE system. This is not the case for self-employed workers as they must work out their income and expenses and pay their taxes each January.
Even if you are not a self-employed individual, you may need to complete a Self-Assessment tax return. For instance, if you are earning rental income from your property, then you must submit a rental income tax return.
Furthermore, if you have substantial income from investments, dividends, and savings, you must submit a tax return. It is important to understand how to pay tax on other sources of income, such as dividends.
Self-Assessment for Sole Traders
As a sole trader, you must declare your business earnings and allowable expenses and submit a Self-Assessment tax return. It is an obligation for businesses that are not separate legal entities.
How Partnerships Must File Tax Returns
You need to complete a SA800 Partnership Tax Return form if you are in a general business partnership. It is mandatory to do so to declare the following:
- Professional and trading income.
- Finance and interest receipts are taxed by building societies and banks.
If you are completing a paper return, then you can get the S800 form from the government website. This includes the supplementary forms. You also have the option to submit your tax return online.
Tax Payments for Limited Companies
You may decide to form a limited company instead of becoming a sole trader. For example, if you are pursuing freelancing. Since limited liability partnerships and limited companies are separate from you, they must file a company tax return. However, you must still send your personal tax return. This should include the salary and dividends you received through the company.
Do You Need to Complete a Self-Assessment Tax Return?
According to HMRC, you must submit a Self-Assessment tax return if in the last tax year any of the following applied to you:
You must send a tax return if, in the last tax year (6 April to 5 April), any of the following applied:
- Before deducting everything for which you are eligible for tax relief, you made over £1,000 as a self-employed sole trader.
- You participated as a partner in a company venture.
- You earned more than £100,000 in total taxable income.
- When you “disposed of” or sold something that gained value, you were required to pay capital gains tax.
- You paid the High-Income Child Benefit Charge.
If you have any untaxed income, you may need to submit a tax return. Untaxed income includes the following:
- Rental income.
- income from dividends, savings, and investments.
- Commission and tips.
- Income from outside the UK.
What Records Must You Keep?
People who need to submit Self-Assessment tax returns must also keep records. It is a legal requirement to do so. HMRC may ask to see your records when checking your tax return.
You can maintain records digitally or on paper.
If your records are inaccurate or incomplete, HMRC can charge a penalty.
If You Are Not Self-Employed but Complete a Tax Return
It is best to keep your records for a minimum of 22 months after the end of the tax year if you submit your tax return on time. Therefore, for the 2024/25 tax year, you need to keep records until 31 January 2027 at least.
You must keep your records for a minimum of 15 months after you submit your tax return if you submit it late.
If You are Self-employed
Self-employed workers and people who let out property need to usually keep business records for a minimum of five years starting from the submission deadline. For the tax year 2024/25, they need to keep records until 31 January 2031.
For more information on record-keeping for Self-Assessment, visit the government website.
How to Register for Self-Assessment
For anyone who is submitting a tax return for the first time, it is necessary to register for Self-Assessment beforehand.
To register yourself, you must follow these steps:
Step 1: Register Yourself with HMRC
Online registration is possible through HMRC. However, the process varies according to your employment status. You can choose the option that applies to you, such as self-employed, not self-employed, or registering a partnership.
Step 2: Obtain Your Unique Taxpayer Reference (UTR) Number
After you register yourself, HMRC will send your UTR number in a letter. This letter will include instructions on how you can set up your Government Gateway account.
Step 3: Access Your Government Gateway Account with Your Activation Code
Then, you will receive another letter which will mention your activation code. You can set up your account with this activation code. Please note that you should do it immediately as the code is going to expire.
Step 4: Finish Setting Up Your Account
You can log in and submit your tax return once you finish setting up your Government Gateway account. This process can take up to 20 working days, so HMRC warns you to not delay it till the last minute.
What is Necessary to Complete Your Tax Return?
To fill in accurate information when completing your self-assessment, you must gather the necessary paperwork, such as
- Your Unique Taxpayer Reference (UTR), which is ten digits.
- The National Insurance digits you possess.
- Your income and previously paid taxes are displayed on a P60 from your employer, provided you have one.
- If you resigned from your position during the current tax year, a P45.
- An expense and benefit report, such as a P11D or P9D.
- An accounting of all expenses and income from rentals.
- Statements from your investments and savings that reflect the amount of interest and other income you have received, such as dividends.
- Records include receipts, bank statements, and account information that attests to your revenue from self-employment.
- Documents proving contributions made to pensions or charity that may qualify for tax breaks.
What is Payment on Account?
Tax payments that you make towards your tax bill in advance are called payment on account. If you pay taxes through a Self-Assessment tax return, you need to make these payments twice a year. The deadline for the first payment on account is January 31st. You must make the second payment on account by July 31st.
When Do I Make Self-Assessment Payments and File My Tax Return?
You need to file your online tax return and pay the tax you owe for the last year by the 31st of January. Even if you miss this deadline by only one day, you will face a fine. After you start trading, it is mandatory to register yourself as self-employed immediately. You must do so by 5th October in the year that you began your self-employment. If you do not register, you will face penalties according to the potential lost tax. The table below shows the important deadlines:
|Online tax return and payment of tax for the previous tax year. First payment on account you need for the following year.
|End of the tax year. HMRC will contact you to file your Self-Assessment tax return.
|Second payment on account.
|Registering for Self-Assessment for the first time.
|Paper Self-Assessment Tax Return.
At any time after the end of the tax year, you can submit your Self-Assessment tax return, technically. That is if you file it by January 31st of the following year. Nevertheless, it is ideal to submit it as soon as you can. By doing so, you will find out earlier how much you need to pay. This gives you plenty of time to arrange the payment.
What are the Fines for Missing the Deadlines?
Please note that there is no acceptable excuse for missing the deadline for submitting your Self-Assessment tax return. This applies even if you do owe anything to HMRC. When you miss a deadline, both unpaid tax and unpaid penalties are subject to interest. Therefore, you must not put yourself in a position where your fines will increase simply because you did not have the time to complete it.
HMRC accepts very few reasons for late payment or filing. If you cannot file on time, then you must notify HMRC about it promptly. This will indicate that you are doing your utmost to get it done.
If you do not file your self-assessment tax return on time:
- An automatic fine of £100 comes your way the next day. (1st February).
- For every day you are late, you will receive an additional £10 penalty for up to 90 days.
- After 6 months delay, you will receive an additional penalty of £300 or 5% of the tax owed. Depending on which is greater.
- After 12 months of missing the deadline, a further £300 penalty or 5% of the tax due. Again, it depends on which is greater.
If you do not pay your tax liability by the deadline:
- After 30 days of missing the deadline, you will pay a penalty of 5% of the amount of tax you owe.
- If 6 months pass by, you will receive a further penalty of 5% of the tax you must pay.
- The final additional penalty of 5% of the tax you owe will come your way after 12 months of missing the deadline.
Along with the late payment penalties, you will have to deal with interest. This is applicable on top of the tax due. The calculation of the rate of interest that HMRC will charge is according to legislation. HMRC has the right to charge the base rate as well as a 2.5% interest on overdue tax payments.
To summarise, if you are liable to submit your Self-Assessment tax return, then you must do so on time. In case you miss the deadline, you will face penalties. Furthermore, make sure you register yourself for Self-Assessment if you have not already. It is important to know how to complete and submit your tax return to ensure compliance with HMRC. You must fill in accurate information when completing your Self-Assessment. Moreover, you should know submit it as soon as possible to avoid any penalties or issues. Please note that there are only a few reasons that HMRC accepts as valid for missing the deadline.