For lots of reasons, January can be a challenging month. After a well-earned break, returning to work with a Christmas hangover can make starting the new year tricky to say the least. For freelancers and contractors, there’s also the small matter of the Self-Assessment Tax Return to contend with. This personal tax return, which all contractors working through their own limited company must complete, needs to be submitted and paid by midnight on the 31st of January. On the face of it, preparing to complete your Self Assessment is a daunting task. After all, who really wants to spend the time that you could be earning money sorting through every invoice and expense to figure how much you owe HMRC?
Nonetheless, to avoid fines from the taxman that start at £100 and mount up considerably over time, it’s important that you have a rough idea of what must be done to meet the Self-Assessment deadline. In this article, we’ll answer a number of important questions that freelancers tend to ask our contractor accountants at QAccounting about the personal tax return.
What is the Self-Assessment Tax Return?
The Self-Assessment is designed to collect income tax from anyone who has earned money that isn’t taxed at source. In this tax return, you’ll need to calculate the amount you’ve earned in the tax year just gone, subtract any legitimate business expenses you’ve incurred personally, submit everything to HMRC and then pay the tax you owe.
If you don’t know where to start or want to make sure that you file everything correctly, don’t hesitate to get in touch with a specialist contractor accountant. Most freelancers and contractors do to be on the safe side.
How much tax will you need to pay?
It varies considerably depending on your earnings. The income tax bands for England and Wales are as follows:
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal allowance | Up to £12,500% | 0% |
| Basic rate | £12,501 to £50,000 | 20% |
| Higher rate | £50,001 to £150,000 | 40% |
| Additional rate | £150,000 and above | 45% |
It differs a little in Scotland:
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal allowance | Up to £12,500% | 0% |
| Starter rate | £12,501 to £14,549 | 19% |
| Basic rate | £14,550 to £24,944 | 20% |
| Intermediate rate | £29,945 to £43,430 | 21% |
| Higher rate | £43,431 to £150,000 | 41% |
| Top rate | Above £150,000 | 46% |
Roughly speaking, how much should you put aside?
While we all know that it’s easier said than done, most contractor accountants will recommend that you save between 20% and 30% of your income throughout the year, ready for your personal tax return in January. Having a pot of money set aside for tax will make life a lot easier when it comes to paying this tax bill.
Which income must you take into account?
Most things. For example, your contractor accountant might have advised you to withdraw a combination of dividends and salary below the taxable threshold from your limited company. If this is the case, the likelihood is that you’ll be paying tax on dividends. Above the personal allowance (£12,500), these are taxed as follows:
| Band | Rate | Amount |
|---|---|---|
| Basic rate | 7.5% | £2,001 – £37,500 |
| Higher rate | 32.5% | £37,501 – £150,000 |
| Additional rate | 38.1% | £150,001 and over |
Dividends and any taxable salary aside, you need to also consider the following income:
- Rental property
- Interest
- Pension
- Capital gains
- Any income from employment
Where do you file it and how do you pay?
Once you’ve finalised everything, head to the Government website. After submitting your information, HMRC will then calculate your tax bill. For most contractors, this will also include a ‘payment on account’, which is an advanced payment you’ll need to make to the taxman for next year’s tax return. If you’re still confused or don’t have the time to do all of this, don’t worry – a contractor accountant will be more than happy to handle this on your behalf.
What happens if you miss the deadline?
As touched on earlier, if you fail to file your tax return and pay what’s owed to HMRC, you will be penalised. Fines begin at £100 for returns filed up to 3 months late and increase. However, if you have a reasonable excuse, HMRC could make an allowance. That’s not to say the tax office won’t still expect you to foot your bill as soon as possible, though.
Anything else to note?
Don’t work yourself up. While the Self Assessment arrives as possibly the worst time of the year, help is at hand. If you need any further information or would like to discuss your Self-Assessment Tax Return with an expert contractor accountant at QAccounting, please don’t hesitate to request a callback – one of our friendly and knowledgeable experts will be in touch.
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