How to complete your self-assessment tax return
It’s January – and that means one thing…
No, not giving up drinking or chocolate.
It means the race is on to complete your annual self-assessment tax return.
Yes, we know tax returns are equal to Dry January when it comes to a lack of excitement – but they are massively important.
Last year, almost a million people missed the deadline to file their self-assessment tax returns – resulting in collective fines of £95.8million.
But do you actually need to complete self-assessment, how do you do it and when’s the deadline?
We’ve got all the answers here…
What is self-assessment?
Self-assessment is how Her Majesty’s Revenue and Customs (HMRC) finds out how much income tax and national insurance you need to pay when you don’t pay at source.
By ‘source’, we’re referring to Pay As You Earn (PAYE).
If you’re employed by a company, you’ll usually pay your tax each month when you get paid through PAYE – but that doesn’t always mean you can avoid self-assessment.
If you have an income from other areas, such as from savings or investments, or from buy-to-let property, you could have to complete an annual self-assessment tax return to declare this.
Who needs to use self-assessment?
Put simply, anyone who earns an income that isn’t taxed through PAYE will need to complete a self-assessment tax return.
If you’re self-employed as a sole trader, meaning your business isn’t incorporated as a company with Companies House, you’ll need to tell HMRC about your annual income so they can deduct income tax and National Insurance from it.
If your business is incorporated as a limited company and you’re a director claiming dividends from profits, you’ll need to complete an annual self-assessment, too.
Do I need to do self-assessment if I use PAYE?
Even if you pay income tax and National Insurance through PAYE, you may still have to complete a self-assessment return each year.
That could be because:
- You’re a limited company director and pay yourself through a mixture of PAYE salary and dividends
- You’re employed and pay tax through PAYE, but have additional income, perhaps from buy-to-let property, other investments or because you run a business on the side
How much can you earn before having to complete self-assessment?
Self-employed workers receive the same tax-free allowance as employed people – which is £12,500 for the 2020-21 tax year.
However, if you earn more than £100,000, that allowance is reduced by £1 or every £2 earned over that amount.
If you have multiple streams of income, meanwhile, perhaps from a job and a business on the side, you still only receive one allowance, and this will usually be applied to your most lucrative income stream.
If you’re self-employed as a sole trader and earn more than £1,000 in a single tax year, you’ll need to complete an annual self-assessment tax return, even if you have no tax to pay once you’ve filed it.
How do I complete a self-assessment tax return?
If you need to complete a self-assessment tax return, you need to register to do this with HMRC.
When you set up a new limited company or start a self-employed business as a sole trader, you’ll need to register for self-assessment.
Even the word ‘tax return’ sounds daunting and can bring you out in a cold sweat.
But completing an annual self-assessment isn’t anywhere near as scary as many people make out.
This is the main section of the self-assessment form and needs to be completed if you:
- Have earned untaxed income through dividends and / or interest
- Paid pension contributions
- Made charitable donations
- Received benefits like the state pension, Child Benefit or Blind Person’s Allowance
If you’ve earned an income as a company director, from self-employment, or property, you’ll need to complete a supplementary page.
This section of self-assessment needs to be completed if you’re self-employed and have earned untaxed income from self-employment.
In this section, you can also declare any allowable expenses that will be deducted from your final tax bill.
If you’ve earned any income from buy-to-let property, you’ll need to complete this section. Again, you’ll be able to enter any allowable expenses that come off your final tax bill.
Paying your tax bill
Once you’ve completed your annual self-assessment return, you’ll be told by HMRC how much tax and National Insurance you need to pay.
You can pay your bill by:
- Online or telephone banking
- Bank transfer
- Direct Debit
Once you’ve paid your first self-assessment tax bill, you’ll need to make payments on account for future tax years.
Payments on account are based on your previous year’s tax bill and are two payments spread across the tax year – the first being in July and the second in January.
So, if your previous year’s tax bill was £2,000, you’d make one payment of £1,000 on account in July and then another of £1,000 in January, along with any balancing payment if you owe more than £2,000 and a first payment on account for the next tax year.
If your bill is less than the previous year’s, HMRC will refund you any over payment.
When is the deadline for self-assessment?
Self-assessment tax returns must be completed, and bills paid, by January 31 each year.
The January 31 deadline refers to the most recent tax year.
So, the self-assessment deadline coming up on January 31, 2021 is for the tax year from April 2019 to April 2020.
Looking to give your business a lift?
Staying on top of your taxes isn’t the only way to keep your business moving forward.
Running it from an inspirational space where you can network with other businesses (including accountants!) is another way to ensure you keep growing at a pace that works for you.