26. Aug 2019 |

Self-Assessment Tax Returns: How it Works

With the recent boom of the gig economy, more and more people are turning to freelance work to help pay the bills. Although there’s more freedom in self-employment, there are also more responsibilities – including knowing how to file taxes as a self-employed person or business owner. In the UK, you’ll need to file a self-assessment tax return each year to pay taxes on the money you’ve earned – or risk facing penalties and paying back taxes you owe to HMRC.

Self-Assessment Tax Returns
Although there’s more freedom in self-employment, there are also more responsibilities – including knowing how to file taxes. (© Unsplash)

What is self-assessment tax return?

A self-assessment tax return is how HMRC collects income taxes from anyone who receives income other than wages, pensions, and savings. Usually, wages are taxed under the Pay As You Earn (PAYE) system, but employees receiving the wages don’t have to file taxes on them because employers pay taxes on the wages on their behalf. But as a sole proprietor or self-employed earner, you are responsible for making sure your earnings are reported to the government. Self-assessment tax returns are the method by which you do this.

Who needs to file a self-assessment?

Anyone who makes income over £1,000 that doesn’t come from wages, pensions, and savings needs to file a self-assessment. The most obvious examples are self-employed individuals, sole proprietors, and business partners, but there can be many other situations in which someone makes a significant side income that qualifies as taxable. For example, this can include anyone who makes money from renting property, or earns a large number of tips or commissions, or has foreign income from working online. If you’re unsure of whether or not you need to file a self-assessment, there is a tool available on gov.co.uk that will walk you through a series of questions to determine whether or not you need one.

Individuals who want to apply for certain tax reliefs sometimes also file self-assessments, such as people who have made charitable donations or those who collect wages but have been required to spend money on job-related expenses.

How can I register for a self-assessment bill?

You can register with HMRC online, at which point they will mail you a letter with a ten-digit number as your Unique Taxpayer Reference (UTR), and an activation code for your online account. You should receive the letter within ten working days, at which point you can use the activation code to access your account – you will only need the code once, but you should keep your ten-digit number safe, as well as the username and password you will create once you access your account. If you have filed a return online before, you’ll already have a UTR, and you can find it online. Once you register, you can fill out your tax return form online, or you can mail it.

How do I calculate my self-assessment tax?

You will pay taxes on income depending on how much you have earned in the taxable year – for example, you will pay 20% income tax if you earned between £12,500 and £50,000, and 40% income tax if you earn over £50,000. However, the total of your business expenses is deducted from your taxable profit, so make sure you hang on to these! Additionally, you will want to keep PAYE and VAT records for the same reason – wages will also offset your taxable profit, and you may be able to claim VAT taxes back from business expenditures if you are registered for it.

Your self-assessment tax is calculated online using the government form by answering a series of questions based on this information, or you can use tax software to help you calculate what taxes you owe. Although you can save your information and come back to it at any time, it’s a good idea to have tax records on hand. Before you begin, make sure your records of income and expenses are handy – accounting software is the easiest way to keep these records all in one place. If you have been using accounting software throughout the taxable year, the totals of your income and expenses will be available to you when you need them, and you’ll also have the detailed records that corroborate the totals in the event you get audited.

When you fill out the form online, you will be able to choose whether you’re using the accrual or cash method of accounting to declare income and expenses. If you’re using the accrual method of accounting, you’ll pay taxes based on the date invoices were sent and expenses incurred – not on the date the cash changes hands. If you’re a smaller business, you may opt to pay taxes based on cash accounting methods instead, which means you won’t pay taxes on accounts receivable you haven’t collected yet. This can be important for small businesses, particularly if you have a lot of outstanding receivables at the time that you are recording your income.

If you’re filling out the form online, you’ll be able to view the taxes you owe as soon as you’ve finished entering your information.

How do I pay my self-assessment bill?

You can pay your taxes through online banking or phone banking, CHAPS, or by debit or credit online if you need the payment to come through within 24 hours. If paying at your bank or building a society, you’ll need a slip from HMRC. You can also pay by Bacs, direct debit, or cheque, but these methods can take up to a few days.

Can I pay my tax bill monthly?

You can set up monthly tax payments that are debited directly from your bank account each month (or even each week) if you’d prefer to spread out your tax payments instead of paying in one fell swoop. If you go to your online account and select the budget payment option in the direct debit form, you’ll be able to decide how much you want to pay at each instalment, and how often.

Self-assessment tax return deadlines

You need to register for self-assessment by October 5th after the end of the tax year (5th of April) you are registering for. Self-assessment taxes are due on January 31 the following year; however, if your tax return was over £1000, you will have another payment on account to make by July 31. This will be in addition to the taxes you owe for the year, but the payment on account will go toward your taxes for the following year.

What happens if I miss the deadline?

If you miss the deadline for registering for self-assessment, you may face a penalty. You’ll also face a penalty of £100 if you miss the payment deadline for your return and additional interest. If you file your return and can’t afford to pay, it’s best to contact HMRC right away – they may be able to set up a payment plan for you that can help you avoid any additional fees.

Filing taxes can sound daunting, but it doesn’t have to be! If you have kept careful records of your business income, expenses, and VAT or payroll if applicable, tax returns can be simpler than you might think. It is, however, important to be prepared – and that means not only keeping detailed records, but also budgeting for your tax bill when it arrives.

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