The frequently asked questions about HMRC self assessment tax returns
You may be interested in our main article on how much income tax you need to pay to HMRC. You may also be interested to know more about our tax saving services for UK landlords and property developers.
Did you know that HMRC pulled in £825 billion in taxes for the year 2019/20. Of this amount £195 billion came from income tax. This is either collected through the employment PAYE schemes or through the submission of your personal self assessment tax return. The top 50% of households pay nearly 80% of the income tax liabilities.
According to the HMRC’s annual income tax report the south east population of the UK accounted for 14.8%, whilst London accounted for 13.4%.
As property accountants, we are regularly asked about income tax and personal self assessment tax returns. We will look to answer the below questions in this article.
– Who must file a self assessment tax return?
– How much do you need to earn before self assessment is required?
– How to register for self assessment with HMRC
– How to sign in the HMRC portal to do a self assessment tax return?
– How do I do a self assessment? / How to file your self assessment tax return online?
– When do I need to pay tax?
– Can I spread my tax bill?
– What is a payment on account?
Why you may be paying too much self assessment tax
Our property tax specialists help over 1,000 of monthly retained UK landlords and property investors to minimise tax whilst building their wealth.
In this article we are going to be focusing on the subject of self assessment and if you need to submit one. We have written a separate email with a guide of how much income tax that you will need to pay to HMRC.
There are many reasons why people pay far more tax than they need. This is because
– They do not know what they do not know.
– They have not spoken to a tax specialist to go through their situation to see what available tax reliefs are available to them.
– Their accountants or solicitor are not aware of the many reliefs that are available to their clients and are not taken advantage of.
– Tax legislation changes but either the person or their accountant / tax specialist have not been made aware
They have not spread their tax bill using the instalment plan
Understanding the basics of self assessment
As property accountants serving thousands of UK landlords that purchase buy to let properties we know that it is difficult to understand thew world of tax when submitting a tax return to HMRC.
Many people pay too much tax because they are not aware of the many tax reliefs that are open to them. People fear that they might face a HMRC tax investigation if they submit a self assessment tax return that shows there is little or no tax to pay. This is clearly not the case but you do not know what you do not know.
HMRC have provided a nice website page that help you to understand all about self assessment tax returns.
It is important to note that the selfassessment tax year starts 6th April and ends a year later on 5th April. You will need to collect all your taxable earnings during the course of this “Fiscal” tax year.
There are three key dates to bear in mind:
– 5th April: the tax year end date for personal self assessment tax
– 30th October: deadline date for submitting a tax return to HMRC in paper format (postal)
– 31st January: This is the ultimate deadline when a tax return can be submitted online. Please note that this is also the date in which tax liabilities need to be paid.
You only pay tax once you have exhausted your personal allowance. A personal allowance for tax purposes is the amount of money that you can earn before paying tax.
Personal allowances increase over time inline with Consumer Price Index otherwise known as CPI. The personal allowance for the tax year 2019/20 was £12,500.
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Who must file a self assessment tax return?
There are many types of people that must file a personal self assessment tax return to HMRC.
– Sole traders must file a self employment tax return in their self assessment when they earn more than £1,000 profit.
– A partner in a business partnership
– Uk landlords or property investors that receive money from renting out a buy to let property
– Tips and commission
– Income from savings, investments and dividends
– If you are in receipt of foreign income such as interest or dividends
– Employees that earn more than £100,000
– Directors/shareholders of their own limited company that receives money in the form of wages or dividends.
– If you have sold an asset and expect to make a capital gain. This would result in you having to pay a capital gains tax liability to HMRC.
In the majority of cases employees will pay their income tax liability through Pay As You Earn (PAYE). However, some employees have other sources of income as outlined above. They will also need to file a self assessment tax return to declare their other forms of income.
HMRC will issue you fines and penalties if you fail to register for self assessment, which also implies that you do not pay the correct amount of tax.
How much do you need to earn before self assessment is required?
There are times when you do not have to file a tax return.
The information above from HMRC can be quite misleading. The above would suggest that you need to file a tax return if you have £1000 rental income. This is not the case.
Here is an extensive list of when people need to file a tax return to HMRC by 31st October if using paper form or online, the tax submission deadline is extended to 31st January:
– People that earn more than their personal allowance of £12,500 (for 2019/20) and have not been taxed through PAYE
– Sole traders that have earn more than £1,000
– Landlords that receive UK rental net income (rental income less costs) of £1,000. There is a caveat to this information relating to the gross rental income received
– £2,500 to £9,999 after allowable expenses
– £10,000 or more before allowable expenses
If your circumstances change and no longer need to file a tax return, please make sure that you contact HMRC to tell them. It is important not to assume that they know. It is unlikely that they know you no longer need to file and will issues you late fines and penalties. Reach out to HMRC to update them on your financial position and filing status.
How to register for self assessment with HMRC?
Once you have identified the fact that a tax return is submitted you may need to register for tax with HMRC.
Before you register for self assessment tax returns you will need to obtain a Unique Tax Reference code (UTR). This 10 digit unique UTR may be obtained by requesting it from HMRC. The UTR is for each tax person. Your UTR tax reference code is unique to you.
You can contact HMRC directly on 0300 200 3310 to see if you already have a UTR or to request a new one. You can also request a Unique Tax reference code by using the online self assessment registration application process.
There are three options for you when registering for self assessment:
UK landlords and property investors that need to register for self assessment would use the “not self-employed” option.
How do I do a self assessment?
As mentioned above that the UK tax year runs from 6th April to 5th April the following year. This means that you will need to collect all your forms of income between these dates.
It is important to note that your tax returns may be done by:
– You, using the online self assessment tax forms
– An accountant or
– Tax advisor
For many people preparing and filing a UK tax return to HMRC is simple enough. Their tax affairs are not complex and hiring an accountant would cost more than the benefits provided.
For people that have more complex financial or tax affairs it make a lot of sense to hire an accountant / tax specialist to help prepare, review and submit your personal self-assessment tax return.
Having someone look over your shoulder should provide greater confidence and comfort that the numbers are right.
The forms of income that you need to declare to HMRC might be as follows:
– Employment income: P60 and/or P45
– Employment benefits in kinds that is not subject to PAYE: P11D
– Pension income: P60
– Income (net) from buy to let property: gross income less costs
– Self employment income (income less costs)
Once you have all this information you will then need to populate this data into your self assessment tax return if you are doing your own.
The deadline for the submission of self assessment tax returns is as follows:
– 31st October if you are posting your paper tax return to HMRC
– 31st January if you are submitting your personal tax return to HMRC online
What records should you keep?
It is important to collect your paper or electronic statements, certificates, expenses in a safe place. HMRC may call upon these certificates up to 20 years if they feel there is a tax fraud with your financial affairs.
Once option is to keep a box file for each tax year where you keep your tax return accompanies with every piece of evidence to support the workings that go into your tax return.
The more evidence that you have to support your numbers in a tax return the less chance that HMRC can ask you to pay additional tax in an investigation process. The rule of thumb is do not include a cost/expenditure if you do not have the receipt to back it up.
When do I need to pay tax?
Upon completing your personal self assessment tax return to HMRC you will need to pay tax.
The tax is due 31st January following the conclusion of the tax year. For example if the tax year is 2020/21 the year end date is 5th April 2021. The tax return and payment of tax needs to be with HMRC no later than 31st January 2022.
Failing to submit your HMRC tax return on time will result in an automatic £100 fine. This is increased over time so it is important to submit and pay your income tax liability in good time.
What is a payment on account?
There is also something called payments on account. A Payment On Account, also known as (POA) is an additional tax that you pay for the upcoming tax year.
– Your last Self Assessment tax bill was more than £1,000
– Less than 80% of future taxes are captured within your employment PAYE system.
If you have a tax liability that is greater than £1,000 and not employed then a POA needs to be paid along with your tax liability on 31st January. The payment on account is the same amount of money as the current years tax liability but spread over two instalments
– 31st January
– 31st July
Let us look at an example here. Sarah has a tax liability of £500. She needs to submit her tax return to HMRC and pay the £500 tax liability by 31st January 2022. She does not need to pay a payment on account for 2021/22 because her tax liability is less than £1,000.
John has a tax liability from his buy to let property portfolio of £2,500. John needs to pay to HMRC by the 31st January 2022 the following:
– £2,500 tax for the tax year 2020/21
– £1,250 for the forthcoming tax year 2021/22 (50% of the 2020/21 tax liability
John also needs to pay an additional £1,250 on 31st July 2022 for the tax year 2021/22. These POAs will be taken into consideration when he files his 2021/22 tax return by 31st January 2023.
It is possible to reduce the POA for the following reasons:
– You are about to retire, meaning you will have less employment income
– You have changed jobs with less money
– You have just been made redundant
– Your self employment business activities is unlikely to be as high
– You expected to make less money from your buy to let property investments.
You can notify the reduction of your payment on account when you submit your personal self assessment tax return to HMRC. It is important not to reduce your POA if you expect your income streams to remain the same. This is because HMRC will issue penalties and fines to you by reducing your POA under false pretence.
Can I spread my tax bill?
For many people it may prove too difficult to pay their income tax liability when submitting their tax return on 31st January. This can be additionally more difficult when you also have to pay the POA on 31st January.
There are many reasons why people are unable to pay their income tax liability
– Loss of their employment job
– Loss of trade on their self employment business
– Loss of rent or higher costs on their buy to let property portfolio
– Personal debts that need to be paid
Whatever the reason why taxpayers are unable to satisfy their tax liability a solution needs to be found. HMRC do allow taxpayers to make instalments over a period of 12 months.
Using the above as an example John was required to pay his tax liability of £3,750. John also has a POA to be made on 31st July. This gives a total tax liability of £5,000. HMRC may allow John to make 12 monthly instalments to reduce his tax liability of £416.67.
Taxpayers can ask for the tax payment instalment as follows:
You may have noticed that the 31st January and 31st March suggest that you can use the online portal to make monthly instalments. Your eyes are not deceiving you. You will avoid late payment penalties and interest if you request to make the payment instalments by 31st January. However, you will pick up late payment penalties if you request to make instalments to reduce your income tax liability after 31st January up to 31st March.
You will not be allowed to make tax instalment payments if:
– You delay contacting HMRC until after 31st March
– Your tax liability for the year exceeds £30,000
– You are behind on previous year’s tax payments
– You are behind submitting your tax returns
If you are unable to make the first instalment of tax on 31st January it is advisable that you contact HMRC on 0300 200 3825.
How does this affect our American readers?
You may also need to file a tax return if you are an American and you have been resident in the UK for 183 days or more. This very much depends on the HMRC residents test.
Not only that but if you are an American or live in the US as a British citizen for more than 183 days you will also need to submit a 1040 tax return to the IRS.
You should not worry too much about double taxation as there are many ways in which you can get tax credits to reduce your IRS tax bill. Typically, you will pay more income tax to HMRC than you would to the IRS on your UK income. It is most likely that you will not have to pay additional federal tax to Uncle Sam in the United States.