For the self-employed tax can prove to be quite a headache. Those lucky enough to be in full-time employment and paid via a PAYE system are in an incredibly fortunate position of having all their tax calculated and deducted automatically each month before they see any money. Some that are self-employed may look at this method with a certain amount of envy, however they will raise a wry smile in the knowledge that they are in full control of their finances.
In the UK there is a self-assessment regime that puts the onus on the individual to calculate their tax liabilities each year and ensure payment reaches Her Majesty’s Revenue and Customs on time. Failure to pay on time draws hefty fines that only increase the longer any tax owed goes unpaid. Fortunately to make it easier for everyone the national tax year runs between the same dates each year and the submission dates also do not move. For those that have been completing self-assessments for a number of years it can become second nature, however for those entering self-employment or starting a business it can become a minefield of confusion and stress. So, how does the self-assessment process work and does it mean you get a better deal for the effort?
The Self-Assessment Cycle
In the UK the fiscal year runs from the 6th April through to 5th April the following year – for example the current fiscal year is 6th April 2015 to 5th April 2016. This is the period that all self-assessment tax returns have to be based on. For most people the self-assessment form they complete will be a SA100 and this has a different due date depending on whether it is submitted online or via post. If you complete the form online you have until the 31st January after the end of the fiscal year – so for 2015-16 you will have to submit by 31st January 2017. If you do not have access to the internet or wish to submit a paper copy via post, this deadline is brought forward to 31st October. If the paper deadline is missed the only option is to submit your tax return online, otherwise there are some quite hefty fines that can be imposed.
With regard to penalties, there has been a relatively recent amendment to the law which now allows HMRC to impose fines that are greater than the due tax. This means that a late filing of your tax return will see a minimum of £100 in fines imposed. If you surpass the 3 month mark you start being charged a £10 per day fine up to a maximum of £900, over 6 months you are fined an additional £300 – or 5% of the tax owed if higher – and over 12 months would see an additional £300 fine imposed, or the 5% if higher. The fine system is in place to deter people from not submitting their returns – although 890,000 people, or a staggering 9%, still missed the deadline in 2015 despite regular advertising on TV, radio and online.
When completing your self-assessment you need to input all the details of any income you have received from any source, but you should also claim back all the tax relief you can. You can legally claim certain expenses. These include running costs of a car – petrol, car tax, insurance, repairs and servicing – although it is based on the mileage you completed for business purposes, running costs of any business premises and any salaries you pay to employees. The often forgotten claimable expense is for a home office, if there is a space that you use for over 25 hours a month for business purposes you can claim a flat rate of tax relief for that space.
Working with a chartered accountant and financial advisor will help you make the most of the tax relief available to you as they will know the law inside out, as well as details of your financial situation. Even though there is a cost attached to financial advice, more often than not they more than pay for themselves through tax relief and claimed back tax each year. It is always a good idea to work with an accountant or financial advisor to help you plan ahead and make the most of your income.
Being self-employed does not have to mean that your tax situation has to be difficult. With some basic organisation and forward planning you can find yourself in a favourable position. If you take advice from financial professionals this position can strengthen even further.
Article provided by Mike James, an independent content writer in the financial sector – working alongside a selection of companies including Chartered Accountants Wellden Turnbull, who were consulted over the information contained in this piece.