What is a Self-Assessment Tax Return?

There’s no getting away from it – we’ve all got to pay tax.

If you work for an employer, tax is relatively simple. Presuming you’re on the correct tax code, your employer taxes your salary at source and sends it directly to the government. But what happens if you’re self-employed, or receive some form of income which isn’t taxed at the source?

If this sounds like you, then you’ll need to complete an annual Self-Assessment tax return. But what exactly does this involve?

Don’t worry. We’ve compiled a basic guide to help you make sense of it.

What is Self-Assessment?

Self-Assessment is an annual tax return which must be completed by anyone who has a form of taxable income which hasn’t yet been taxed. This could be, for instance, profit from a sole trader business, capital gains, or income from rental property.

Put simply, Self-Assessment is HMRC’s way of collecting tax, National Insurance (NI) and other contributions from workers who don’t have their income taxed at source.

Paying tax at source usually refers to Pay As You Earn (PAYE), which is how most employed people in the UK pay tax on their earnings. With PAYE, employers process staff salaries each month, deducting the income tax, NI contributions, pension contributions and any student loan repayments from the employee’s total – or ‘gross’ – salary. The remaining sum – known as the ‘net’ salary – is paid to the employee. This way, tax and other deductions are taken care of, and the employee doesn’t have to get involved.

Self-Assessment is similar to PAYE, but instead of an employer working out deductions and sending the sum owed to HMRC on your behalf each month, it’s down to you to report your income, calculate the deductions due at the end of each financial year, then pay the sum owed to HMRC yourself.

What does Self-Assessment involve?

Self-Assessment involves using an online form via the HMRC website (in some cases, a paper form is used), to answer questions about your income and circumstances over the past financial year.

You’ll need to include details about your employment status, marital status, income from all sources and any allowances or benefits you may be eligible for. If you’re self-employed, for example as a sole trader, you’ll need to include details of your business expenses, a profit and loss account and a balance sheet.

When you pay your tax using Self-Assessment, it’s a good idea to keep your tax separate from your net salary throughout the year to ensure you don’t mix up the two, and you must pay the HMRC promptly to avoid fines.

Who needs to complete a self-assessment tax return?

Anyone who earns money in the UK which isn’t taxed at source must submit a Self-Assessment. This includes, but is not limited to:

• sole traders earning more than £1000 annually
• those in receipt of some covid-19 grants
• anyone making income from rental property
• people receiving income from savings or investments
• those in receipt of dividends (including limited company directors)
• people receiving foreign income
• those in a business partnership
• parents eligible for child benefit higher income charge

How do I complete my Self-Assessment?

First, you must register for Self-Assessment on the HMRC website. To do this, you will need to prove your identity using a Government Gateway ID or GOV.UK Verify. Once registered, you’ll get a Unique Taxpayer Reference number (UTR) which you’ll use when paying HMRC going forward.

You’ll also need personal details such as your address and National Insurance number, and you should have your annual accounts to hand as HMRC need a detailed account of all income you’ve received over the past year.

On the Self-Assessment form, you’ll need to declare the following:

• net profit from all work undertaken over the past year
• interest and dividends from UK banks and building societies
• any income from UK property
• pensions, annuities and other benefits
• income from trusts
• capital gains
• details of any tax reliefs and charitable giving
• details of any student loan repayment plans
• declaration of child benefit high income charge
• stock dividends, bonus issues of securities and redeemable shares
• patent royalty payments

It’s likely that many of the income sources listed above won’t apply to you, but you need to go through the whole Self-Assessment document to declare those that apply to you and those that don’t.

If you’re self-employed, for instance as a sole trader, you will need to include:

• Tax allowances for vehicles/ equipment
• Business expenses
• Profit and loss
• A balance sheet

After you’ve completed the Self-Assessment tax return, the HMRC will give you a Tax Calculation Summary, which shows in brief the tax, NI and other contributions you owe. If its correct, you can then submit your form.

Then, you’ll get an email from HMRC with a link to your Annual Tax Summary. This is a rundown of the tax, NI and other contributions you’re due to pay for the previous financial year, as well as a breakdown of how the government will spend it.

When do I need to complete my Self-Assessment tax return?

You must submit your Self-Assessment tax return for the previous tax year by no later than 31 January. Any tax owed is also due by this date. If you make payments on account, these are due by 31 July that year.

If you’ve filled out a paper tax return, this is due earlier than the online returns – by 31 October prior to the January deadline.

If you choose for HMRC to collect the tax you owe automatically from your wages and pension, you must submit your online return by 30 December before the January deadline.

What happens if my Self-Assessment tax return is late?

If you file your Self-Assessment tax return late, HMRC will charge you interest and a £100 late payment penalty.

If it’s more than 3 months late, a £10 per day penalty will be added to your final bill until it’s paid.

Can a Self-Assessment accountant handle it for me?

Of course! Completing a Self-Assessment can be confusing, especially if it’s your first time. Getting it right with the help of an accountant will give you peace of mind that your accounts are in order – meaning you avoid nasty surprises in the future. If you want to learn more, please get in touch with one a member of our team.