The self-assessment tax return deadline is almost here, and many people have yet to file theirs, so City A.M has asked Jenny Holt, managing director of customer savings and investments at Standard Life, for some advice.
First things first though, the deadline for filing self-assessment tax returns is 31 January, with returns needing to be submitted online by midnight.
If you are one of the categories of people who needs to send a tax return – for example if you are self-employed or earning a taxable income of over £100,000 – then you need to sit down and do yours pronto.
Holt adds that: “Tax returns can fill people with dread, but it’s important to understand what’s required and file it on time to avoid any penalties which can be costly. “
She says higher earners, even those who are not self employed should complete a self-assessment tax return as it can boost pension contributions.
This is because pensions are tax free, so if you’ve paid tax on income that has gone into your pension you could be missing out by accidentally paying tax of 40 per cent, when you do not need to.
Bad news for those who have left it last minute is that if this is your first time filing a self-assessment tax return, you’ll need to register which can take up to 20 days, so you might miss the deadline if you’ve not done this yet.
What is self-assessment and who needs to do it
Holt explains that self-assessment is a system HM Revenue and Customs (HMRC) uses to collect Income Tax. If you are employed, your income tax is usually automatically deducted from your wages by your employer, but if you are self-employed or receive any other income, you will need to submit a self-assessment tax return each year to pay income tax and National Insurance.
You’ll need to file a self-assessment if, in the last tax year:
- You were self-employed as a ‘sole trader’ and earned more than £1,000 (before taking off anything you can claim tax relief on)
- you were a partner in a business partnership
- you earned £100,000 or more
“If you need assistance with your self-assessment, then you can contact HMRC, or find an accountant accredited in the UK to help. You can also appoint a relative or friend to fill in and send your tax return on your behalf.
I’m nowhere near retirement so why worry about my pension?
Holt explains that if your are earning £50,001 a year or over, not completing a self-assessment tax return could lead to you missing out on valuable tax relief on pension contributions.
“Anyone with a pension receives 20 per cent tax relief on every contribution they make, and this is added automatically. However, higher rate taxpayers need to claim the extra 20 per cent of tax relief they are entitled to, which will then be repaid via a tax rebate, a change in tax code (which will mean you’ll pay less tax the following year) or a reduction in your tax bill for the current year.”
She adds that this is particularly important for those earning between £100,000 and £125,140 who can take back some of their personal allowance and receive relief at an effective rate of 60 per cent. If you’re using salary sacrifice to make contributions this might not be necessary – you can always check with your employer if unsure.
“Higher rate taxpayers should complete a self-assessment return every year they’ve paid higher rates, and anyone that hasn’t done this may have built up unpaid tax relief in arrears. It’s worth investigating if you think this applies to you, as you can make claims for up to four previous tax years, meaning you could be owed thousands of pounds from the government. HMRC doesn’t tend to prompt non-self-employed people to submit a self-assessment, so any higher rate taxpayers who pay their tax through PAYE need to actively request to submit a tax return.”
Self assessment: what else do I need to know?
Once you start completing a self-assessment, you will be expected to complete one in each future year. Be sure to make a note in the calendar for when the time comes again.
Another important reason to have a good grip on your tax return if you’re a higher earner is there’s a chance you might have exceeded your annual allowance, and it’s your responsibility to disclose this. The annual allowance is the amount you can pay into your pension each year with tax relief, and this sits at £40,000 for most people. If you’ve already started accessing your pension your annual allowance will reduce to £4,000, and if you earn £200,000 or more your allowance could begin to be ‘tapered’ down to £10,000.
Self assessment and bonuses
“While not related to self-assessment directly, this is often a good time of year to think about pensions if you’re lucky enough to receive an annual bonus, which are often paid just before tax year end in April. Many employers will give you the option to divert some or all of your bonus into your pension. Paying bonus money into in your pension could mean you get to keep more of it, maximise your pension benefits and take full advantage of the power of compound growth, or ‘snowballing’. This is when you achieve investment growth not only on the money you’ve invested, but also on the growth you might have already experienced. Unlike most savings accounts now, this will give you the potential to match, or even beat, inflation.“
How to submit your tax return
After you’ve registered, HMRC will send your Unique Taxpayer Reference number and instructions to set up your Government Gateway account. Once you’ve done this, you’ll be sent an activation code to finish setting up the account. You’ll then be able to use the HMRC online service to submit your return. Alternatively, you can send your tax return via post.
What happens if I missed the deadline?
“If you fail to file your return, file it after the deadline, or fail to pay your tax bill, you’ll incur a penalty. If your return is up to three months late, you’ll be charged £100, and if it’s any later then you could be charged an extra £10 a day up to a maximum of £900. If you’re late paying your tax bill then you’ll be charged interest on late payments too. You can appeal against a penalty if you have a legitimate excuse, but it’s far less hassle to file your return on time and pay your bill in the first place!”