A self-assessment tax return is the system used by HMRC to collect income tax that’s not taxed at source – but do you need to complete one?
Self-assessment tax returns are most commonly associated with the self-employed but there are several situations that might require you to complete one. In short, unless already taxed at source – for example, salary paid though PAYE – any taxable income requires a self-assessment.
Why you might need to submit a self-assessment tax return:
Sole traders with over £1,000 income
Partners in a partnership business
Directors of limited companies
Employees earning over £100,000
Those earning more than £50,000 and receiving child benefit
Capital gains
Anyone who receives income that isn’t taxed at source
HMRC has issued you a notice to submit a tax return
We’ll go through each of these in turn below to help you understand if you need to complete a self-assessment tax return. As with all financial matters, if in doubt it’s always best to seek professional help from your bookkeeper or accountant, or contact HMRC directly for advice.
If you are still unsure, then HMRC has a tool to check if you need to send a self-assessment. Alternatively, get in touch with us and we’ll help you through the whole process.
Sole traders with more than £1,000 income
Unlike employees of a company, the income a sole trader receives from their business isn’t taxed at source. Therefore, a self-assessment needs to be completed to inform HMRC of income and any tax owed.
In 2017, HMRC introduced the £1,000 trading allowance for individuals with low levels of income from trading – for example casual babysitting or small profits from selling goods on eBay. Anyone whose earnings are less than £1,000 in a given tax year does not need to declare this income or fill in a self-assessment.
Partners in a partnership business
Similar to those who are self-employed, each business partner will be taxed on their share of the profit. So, in effect, each partner is treated as a sole trader for tax purposes meaning each partner needs to fill in a self-assessment.
Additionally, the partnership business as a whole will need to submit a tax return to HMRC.
Directors of limited companies
Most limited company directors receive income through a combination of a salary and dividends. Salary is taxed at source, however, dividends aren’t. Therefore, company directors receiving dividends must file a self-assessment tax return reporting all income and any tax liability due.
For a director who is only paid through PAYE and hasn’t received a notice to file a self-assessment tax return from HMRC, it may be likely that you do not require to submit one but it is always worth checking.
Employees earning more than £100,000
Even though you are receiving your earnings through PAYE, which is taxed at source, HMRC classes those who earn more than £100,000 in a tax year as a high earner and they will want to take a closer look at your income.
This means you will need to fill in a self-assessment tax return. High earners often have more than one source of income, making for a more complex financial position HMRC like to know this is all properly accounted for.
Being a high earner also affects your personal allowance – the level above which your earnings become taxable. The personal allowance it goes down by £1 for every £2 your income goes above £100,000. This can become complicated, which is another reason HMRC likes high earners to submit a self-assessment tax return.
Those earning more than £50,000 and receiving child benefit
Child benefit is money paid to those responsible for bringing up a child. It is non-taxable but if you or your partner earns over £50,000, then you could be liable for a tax charge. For every £100 of income between £50,000 and £60,000, the income tax charge will be 1%. If you or your partner’s income is over £60,000 then the tax charged will be the full amount of child benefit received.
If you or your partner fall into this category, then HMRC requires a self-assessment tax return to be filled in and the tax charge paid. If you are unsure if you are affected by this, take a look at the HMRC’s child benefit tax calculator tool or get in touch with us and we’ll help you through the process.
Capital gains
Capital gains tax is the tax charged on any profit made from selling an asset and most capital gains tax is paid through your self-assessment tax return. It applies to most assets however there are several exceptions – for example your main residential home, most cars and personal possessions sold for under £6,000.
There is also a tax-free allowance of £12,300 (20/21 tax year) to take into account. There are some complex rules in relation to capital gains tax, so it’s always best to check with an expert if this applies to you.
Anyone who receives other un-taxed income
Above, we have discussed some of the specific scenarios that would require you to fill out a self-assessment tax return. However, the bottom line is anyone who receives any income that isn’t taxed at source will likely need to fill out a self-assessment tax return.
This might include income from property rental, savings, investment, dividends, foreign income, tips and commission.
If you receive income that’s not taxed at source, it’s important to inform HMRC of this and ensure the correct tax on that income is paid.
HMRC has issued you a notice to submit a tax return
If you receive a letter from HMRC informing you that you must fill in a tax return, it’s likely to have been triggered by one of the scenarios discussed above and you must comply with the request.
In the case that you feel HMRC is incorrect then you cannot just ignore the letter – you must apply to HMRC for it to be withdrawn and they will inform you if you still need to submit a self-assessment or not.
When to register and submit your self-assessment tax return?
If you are required to submit a self-assessment tax return, you must register with HMRC by 5th October following the tax year you received the income.
So, if you received income in February 2020 you would need to register by 5th Oct 2020 because February falls within the 2019-2020 tax year. If you received income in May 2020, you would need to register by 5th October 2021 because May falls within the 2020-2021 tax year. Please note this is when you need to register by, the submission date is different.
The submission deadline is January 31st after the tax year your income relates to. For example, income received between April 2019 to March 2020 will need to be submitted in your self-assessment tax return by January 31st 2021.
You will need to collate a complete record of your income. You may also be able to reduce the tax you’re due to pay by providing an account of allowable expenses.
Lava Sky Accounting can help you with your self-assessment tax return, from registration through to completion and submission. Get in touch today and let us take the stress of your self-assessment tax return away.