For every starting entrepreneur, filing a Self Assessment for the first time can be a bit of a headache.. There are quite a few things to know and understand before you can feel comfortable with the whole process. So, to help you have a smoother start, we have created a full guide that will explain everything there is to know about Self Assessment tax returns.
What is it and who needs to do it?
Your Self Assessment tax return is a way to inform HMRC about your earnings and capital gains during a given tax year. It allows people to claim tax allowances and reliefs, if needed, and also enables HMRC to calculate the amount of tax you are required to pay. You can complete your Self Assessment tax return on a paper form or through an online account.
Generally, Self Assessment doesn’t apply to people who are employed by a business – that’s because the employer does everything for them through the PAYE Scheme when running a payroll. However, there are some situations where you will have to complete a Self Assessment Tax Return if you’re employed, so check out the list below.
If you fall into one of these categories you’re required to register for Self Assessment, file an annual personal tax returns, and pay Income Tax and National Insurance contributions through Self Assessment:
- Self employed individuals and sole traders earning more than £1,000 per year;
- Limited company directors – Directors however do not have to register for SA or file personal tax returns if all of their income from all sources is paid and taxed through PAYE (or similar). In such instances they are treated as employees for tax purposes. There is also no requirement for directors to register if they do not receive any taxable income.
- Limited company shareholders;
- Members of limited liability partnerships (LLPs), unless their income is salaried;
- Partners in a business partnership;
- Anyone who receives income from land or property in the UK, tips or commission, dividends, investments or savings, non-UK sources;
- People earning more than £100,000 per year;
- Anyone in receipt of Child Benefits who earns (or whose partner earns) over £50,000;
- Individuals who wish to claim certain Income Tax reliefs;
- Anyone who has to pay Capital Gains Tax;
The deadline for Self Assessment and penalties
The deadline to file your Self Assessment tax return is 31st of October for paper returns and 31st of January if you’re filing digitally online.
Missing this deadline will result in financial penalties and these are no trivial matter. If you fail to file on 31st of January, you get an automatic fine of £100. This increases the further you delay your Self Assessment – a fine of £10 a day is applied after 3 months and 5% of the amount of tax owed at 6 months of being late..
It’s always recommended to prepare and file your Self Assessment Tax Return early. Most people underestimate the time it will take them (or their accountant) or forget that HMRC becomes extremely busy and nearly impossible to contact close to the deadline date. In fact, nearly a million people miss their deadline and get fined every year..
Early completion of your Self Assessment will also give you more time to plan and budget for any payment of taxes.
How to register for Self Assessment?
If you’re filing your Self-Assessment Tax Return for the first time, you will have to register with HMRC. You’ll need to create an online account and receive a unique taxpayer reference (UTR). If you’ve filed a tax return before, you should already have your UTR.
For security, HMRC will send an Activation Code to you by post to validate and activate your online account. Bear in mind that it may take up to 10 working days to receive your UTR and your Activation Code, so you should do that as early as possible.
What should be included in my Self Assessment?
You should keep any information about your business and earnings or other income that is needed for your Self Assessment Tax return.
When completing your Self Assessment Tax Return you will be asked to provide::
- Details of your income and capital gains, including interest, dividend payments from company shares, pensions and annuities, benefits, rental income and any other taxable income
- Details of tax reliefs and allowances you are claiming, including registered pension schemes and Gift Aid
- You may also have to complete supplementary pages for some types of income – if you receive a directors salary through payroll, you must include form SA102 which provides information about your employment such as employment income (on your P45 or P60);
What expenses can I claim as a sole trader?
Just like any business, your business as a self-employed person will have certain running costs. You are allowed to deduct some of those from your taxable profit, if they are allowable expenses. These expenses should be wholly and exclusively used for the purposes of your trade.
So, for instance, if your income this year was £30,000 and you had £5,000 worth of allowable business expenses, you will only have to pay income tax on £25,000.
Here are some examples of allowable expenses you can claim:
- Any office costs, such as stationery and phone bills.
- Travelling costs: fuel, parking costs, train and bus fares, etc .
- Financial costs, like insurance or bank charges.
- Professional fees, such as a bookkeeper and accountant.
- Costs of your business premises, such as heating and electricity. This can also partly apply if you’re working from home.
- Any equipment, machinery, vehicles or other materials needed for business purposes.
- Marketing and advertising expenses, like website maintenance.
- Educational costs related to your business, for example training courses
While the majority of sole traders make use of it, claiming business expenses is optional;
Personal Allowance – what is it and how to use it?
Your Personal Allowance is the amount of income you are entitled to earn free of tax each year. The amount of personal allowance you receive is set by the government and can change in each tax year.
To find out your Personal Allowance, simply multiply your Tax Code by 10. The standard Tax Code for the 2020-21 tax year is 1250L, so the annual Personal allowance will be £12,500.
If you think your Tax Code is wrong you should contact HMRC.
You don’t need to apply for Personal Allowance – you simply file your tax return and only pay taxes for the earnings above your threshold.
An example of this:
In the tax year of 2018-19, the Personal Allowance was £12,500. This means that, for instance, sole traders whose taxable income for that year was £50,000 paid income tax on £37,500.
You can check the current rates in the GOV.UK page.
Keep in mind that your personal allowance amount may also differ if you earn above £100,000 or if you are claiming other allowances, such as Marriage Allowance.
Do I need to file my Self Assessment Tax Return if I earn less than my personal allowance?
Yes – as mentioned above, any self-employed person who has earned more than £1,000 needs to file a Self Assessment Tax Return, even if you don’t need to pay any tax.
How much National Insurance do I need to pay?
Together with paying your Self Assessment tax, you also need to pay National Insurance contributions (NIC’s). There are usually 2 types of NI rates: class 2 and class 4, that provide you with a rate based on your yearly profits. These may also differ every tax year, so make sure you are up to date with them when filing your tax return.
You can check which National Insurance rates apply to you on the GOV.UK website.
Should I use an accountant to file my Self Assessment Tax Return?
Some sole traders decide to file their Self Assessment Tax Return themselves if their affairs are straightforward, or they don’t have as much income / expenses or simply don’t need or can’t afford an accountant.
However, once your business starts growing, the time you have to spend on this task will also increase and it will gradually become more complicated. This is when it’s worth considering professional accountancy services.
A professional accountant will prepare your Self Assessment Tax Return and ensure all of your allowable expenses have been taken into account to minimise your tax liability and ensure your Tax return is filed on-time.
You will have access to expert financial advice and any other help you may need.
Need help with your Self Assessment?
We hope this guide will help you to understand your Self Assessment Tax Return. You might even feel encouraged to deal with your own if it’s really simple. But it can be a complicated process and it’s easy to overlook something that would save you paying more tax than you need to. So you might like to talk to us and we’ll look after everything for you
At ASfB, we work with businesses of all sizes, including sole traders. We will take care of your finance function and help minimise your tax liability, while you can focus on what you do best (which is most likely not accounting).
We will be there for you every step of the way, providing valuable guidance and support.
Call our friendly team on 01202 755600 or drop an email to firstname.lastname@example.org for an informal chat.