Self assessment tax returns for individuals

Self assessment tax returns for individuals

Who needs to submit a personal annual self-assessment tax return?

The answer is generally anyone who had any untaxed taxable income and/or you were a director of limited company and/or a partner in a business partnership during the tax year.

The HMRC website states you need to complete an annual tax return if during the tax year –

  • You were self-employed
  • You received more than £2,500 untaxed income from tips or renting out a property etc.
  • Your pre-tax income from savings or investments was greater than £10,000
  • Your income from dividends was greater than £10,000
  • You made a capital gain on selling a second home or shares and need to pay Capital Gains Tax. Annual CGT exemption £11,100 (2016/17)
  • Yours or your partners income exceeded £50,000 and you claimed child benefit during the year
  • You received income from abroad which needed to be taxed in the UK
  • You lived abroad but had UK income
  • Your taxable income exceeded £100,000
  • Your state pension was greater than your personal tax allowance and was your only source of income (unless you started getting your pension on or after 6 April 2016).

Source – https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return

The tax year runs from 6th April to 5th April the following year. Using 6th April 2016 to 5th April 2017 the deadlines would be –

  • To register with HMRC   5th October 2017
  • To file a paper tax return   31st October 2017
  • To file your tax return on-line   31st January 2018
  • To pay your tax liability   31st January 2018

In some circumstances you can pay your tax liability through your following year’s PAYE tax coding providing you file your return prior to 30th December 2017.

Penalties

Should you fail to notify HMRC, you need to submit a tax return by 5th October then HMRC can apply a penalty which could be tax related. If you register late but file your tax return and pay the tax liability by the due date, HMRC may not apply the penalty. I always advise my clients to register, even if late, and to get their tax return and payment to HMRC in on time. Usually the late notification penalty is not applied.

With regards to late filing of a tax return or late payment of the tax liability, a £100 penalty will always be applied, even if only a day late. This penalty rises substantially after three months overdue for either the filing of the return or non-payment of the tax due.

You can appeal a penalty providing you have a reasonable excuse such as a close relative died shortly before the deadline or a fire or flood prevented you from meeting the deadline.

Filing a return

When you file your tax return, your tax liability will be calculated. An example may be –

For the year ending 5th April 2017 a tax payer has a job with a salary of £25,000 and benefits (say private medical insurance) of £1,000. The tax payer has paid £2,800 PAYE tax through their employer’s payroll but they also rent out a “buy to let” property and make £5,000 profit.

Calculation Result for 2016-17

Income received (before tax taken off)

Pay from all employments

£25,000

 
 
 
 

plus benefits and expenses received

£1,000

 
 
 
 

Total from all employments

£26,000

 
 
 

Profit from UK land and property

£5,000

 
 
 

Total income received

£31,000

 
 

minus

minus Personal Allowance

£(11,000)

 
 
 

Total

 
 

£11,000

 
 

Total income on which tax is due

£20,000

 
 

How I have worked out your Income Tax

Pay, pensions, profit etc. (UK rate for England, Wales and Northern Ireland)

Basic rate

£20,000

x 20%

£4,000

Total income on which tax has been charged

£20,000

 
 

Income tax charged

 

£4,000

Minus tax deducted

From all employments, UK pensions and state benefits

£2,800

 

Total tax deducted

£2,800

Total income tax due

£1,200

This means our tax payer owes HMRC an additional £1,200 income tax which is due for payment by 31st January 2018.

Payments on account

In addition to paying our 2016/17 tax liability (£1,200) by 31 January 2018, our tax payer will have to pay payments on account towards their 2017/18 tax bill should their 2016/17 income tax (and class 4 NI if a sole trader) was greater than £1,000.
An exception to this is if the tax payer pays 80% or more of their tax liability through a tax code or the tax is deducted at source.

Because our taxpayer owes £1,200 income tax, they will have to pay in addition to the £1,200 two payments on account, each payment amounting to half of the tax liability (£600) on 31st January 2018 and 31st July 2018. This in effect is paying the 2017/18 tax liability upfront, the system assuming your tax liability next year (2017/18) will be the same as the current year (2016/17).

So our tax payer will have to pay HMRC –

31st January 2018 (2016/17) £1,200
31st January 2018 (2017/18) 1st POA £600
Total payment due £1,800
31st July 2018 (2017/18) 2nd POA £600

Our tax payer will have paid £2,400 in total, £1,200 for his actual 2016/17 tax liability and another £1,200 towards his 2017/18 liability which will be due 31st January 2019. Payments on account hits taxpayers hard in the first year as you are effectively paying 150% of your first tax liability in January and a further 50% in July. That is why it is always a good idea to plan ahead in your first year to cover the potential liability. Once the payments on account are paid the following years are less of a burden. Say our taxpayer has exactly the same tax liability for 2017/18 i.e. £1,200 then the payment due will be –

31st January 2019 (2017/18) £1,200
Paid POA £(1,200)
31st January 2019 (2018/19) 1st POA £600
Total payment due £600
31st July 2019 (2017/18) 2nd POA £600

So if our taxpayer stays exactly the same they will just pay the £1,200 POA every year thereafter.

Should the following year’s tax liability change then the taxpayer will have either overpaid or underpaid through their POA and so HMRC will make an appropriate adjustment to bring the tax paid and future POA on account back into line.

A final point on POA is the taxpayer can amend the POA should their circumstances change, for example if the taxpayer knows their next year’s tax liability will be lower then they can apply to reduce the POA accordingly. One note of caution: should you apply to reduce your POA too much, HMRC will apply interest to any underpayment of POA from the original POA figures.

As always, please seek professional advice prior to making any decision. This article is intended to demonstrate the main principles of a self-assessment tax return only.

Burton Mail – Wednesday 06 December 2017. Next month we will look at Rental property accounts and taxation.