How to complete a Self-Assessment tax return

Completing your self-assessment tax return

Thinking about how to complete your self-assessment tax return so you can file it on time?

You’ve come to the right place!

According to HM Revenue & Customs (HMRC), 958,296 people failed to file their self-assessment tax returns by the deadline, 31 January 2020, whereas over 700,000 others filed their returns on the last day. Since you are here, I’m guessing you wouldn’t want to be one of those people!

If you don’t wish to face the £100 fine associated with late filing or go through the pain of filing at the last minute, it’s critical to prepare your return ahead of time.

In this guide, you’ll learn everything you need to know about how to file your self-assessment tax return and whether you should seek professional help or not.

So, let’s begin.

Who must file a tax return?

First of all, let’s clarify who has to complete a self-assessment tax return in the UK.

The majority of people who are asked to file their return with HM Revenue & Customs are self-employed individuals and those who have other forms of untaxed income. For example, if you received rent from a property that you own, you would have to file a self-assessment tax return. This is true even when your trading activity, be it your sole trade or property rental business, results in losses.

Even if your tax was deducted at source (through PAYE), you must file a self-assessment tax return to declare untaxed income from other sources, such as investment income, dividends, commissions or foreign income.

To check if you need to send a self-assessment tax return, use this tool on gov.uk.

Do I need an accountant to file my tax return?

Many people in the UK file or attempt to file their self-assessment without the help of an accountant. Providing your situation has no particular complexities, this is a reasonable thing to do. There is enough guidance available online to allow anyone who doesn’t mind doing a bit of reading and who considers technology to be their friend to figure out how to do this correctly. I am always happy to enable people to do this for themselves. Therefore, this blog aims to offer some essential guidance to anyone who wants to complete their self-assessment tax return online without professional help.

I will assume that my readers are mainly those who are going to be filing their tax return for the first time. 

The first step

So, the first thing you have to do is to go to the HMRC’s website and sign up for a Government Gateway online account. Without having done this step you won’t be able to file your tax return – neither using the HMRC’s free filing facility nor through any of the cloud bookkeeping software you may have. To sign up, have your driving licence (or a UK Passport), your residential address and the National Insurance number handy. If you are ready to do this now, use this link and follow the onscreen instructions.

Once you have created a password and received your new account ID, you can login and navigate to the place which offers you an option to file your self-assessment tax return online. 

When you are beginning to file your return, arrange for the following:

  • Your National Insurance Number
  • Your UTR number
  • Accounts, receipts, invoices, and other income records
  • Expense-related records
  • Contributions to charities or pensions, if you have any of these
  • P45 and/or P60 forms, if applicable
  • Bank interest certificates
  • Dividend certificates, if you have any

Self-Employment page

I will fast-forward now to the key details about your self-employment that you should include in your tax return in order for it to be processed successfully. You should have these details handy once you start completing your return. HMRC’s online navigation system will offer you a bunch of questions which you will have to go through carefully, choosing which box to tick and which to leave out. Some of the questions are going to be multiple choice. Though some of the questions might sound confusing to you, as a general guidance, I suggest you stick to what you know about your situation and trust that you will be able to recognise those questions that are relevant to you rather than let yourself be thrown by any words you don’t understand. In the first instance, leave out anything that doesn’t sound like your case, even if you can’t be 100% sure. To reassure you, I would say that HMRC is constantly trying to adjust the language and questions they use to make their tax filing facility more accessible and easier to follow for non-professionals. 

Since this guide has been created having, mainly, self-employed folk (freelances & sole traders) in mind, I will go through the key points relevant to completing a self-employment page of a self-assessment tax return (SA100).

So, on the self-employment page, you will have to include your business income and your business expenditure. 

Let’s start with the income. 

Income

Business income constitutes any form of proceeds derived from rendering your services or selling your product(s). Some people have a separate business bank account for everything business-related, some use their personal account. Both options are fine. In addition, some types of business still receive part of the income in cash. To calculate your total annual income, you have to add together all income paid into your bank account(s) plus anything that was received in cash. 

The time period you have to account for your self-employed earnings can either coincide with the tax year dates (for example, the tax year 2019/20 runs from 6 April 2019 to 5 April 2020) or, if you started trading part year through, your period is going to be from the beginning of the trade to the end of the tax year.

Expenditure

With regards to expenditure, I suggest you follow these steps:

1. Go through all your available receipts and bank statements and make a list of everything you spent during your trading period; plus, any pre-trading set-up expenditure you might have had.

2. Break down your expenses into different categories, such as: travelling, insurance, materials, professional subscriptions, mobile phone, motor expenses, business mileage, etc. Each business would have its own set of expense categories. It’s always a good idea to be able to compare your outgoings for a particular category in different periods.

3. Check if you purchased any pieces of capital equipment for your business which you can claim an Annual Investment Allowances for (e.g. a phone handset, a computer, bicycle, etc.), and hence reduce your tax bill. Bear in mind that there are two types of expenditure: revenue expenditure and capital expenditure. Revenue expenditure constitutes costs of anything that is going to be used by the business during the same trading period, whereas capital expenditure constitutes costs of items that can be used for a few years or sold out on the open market.

It is worth mentioning what type of expenditure can count as business-related. HMRC defines business expenditure as being incurred “wholly, exclusively and necessarily” for business purposes. So, use this rule as a guidance. You can also account for a partial business use for things like home landline and broadband and include a small allowance for use of your home as an office. Read about home usage allowances in more detail here.

Short or full disclosure of business expenditure?

If your annual income (or turnover) is below £85,000, HMRC will offer you two choices with regards to how you want to declare your expenses – as a lump sum (“short form” or SA103S) or broken down into different subcategories (“full form” or SA103F). If your business expenses are much less than your business income, I suggest you go for a “short form”. However, if your expenses are quite high in proportion to your business income, I would go for the detailed disclosure even if your turnover is below 85K. This achieves greater transparency and lowers the likelihood of HMRC inquiring into your tax return.

For most small businesses there are two alternative methods of calculating your self-employment income and expenses – the accruals basis and the cash basis.

The accruals basis uses basic accountancy principles to ensure that only receipts and expenses which apply to the accounting (trading) year are recorded in that year. If you want to use the accruals basis then nothing needs to be ticked on your Self-Assessment return.

The cash basis allows businesses to account for their income and expenses when they actually receive payment or when they actually pay for an expense. By using the cash basis, you will not need to calculate debtors and creditors at the year-end, nor perform a stock-take or estimate accruals and prepayments.

Most sole traders with annual sales of less than £150,000 can choose to use the cash basis on their self-assessment tax return. If you want to use the cash basis then you must tick the relevant cash basis box on the Self-Assessment tax return. Most capital equipment can be treated as an expense under the cash basis (this does not include land, buildings, cars and motorcycles). Having said that, if this is your first year of being self-employed and your initial set up expenditure was higher than your self-employed earnings and, at the same time, you were employed for part of the tax year, I suggest not using the cash basis. The reason is that while the cash basis offers greater simplicity, it won’t allow you to set off your self-employment losses against other taxable income (usually, employment) and get a tax refund from HMRC.

Employment page

Many people, especially when they are just starting a business, would have employment earnings too. Even though the income tax on your salary was deducted through the PAYE system, you would still need to include information about your employment earnings and tax deducted in the employment page of your self-assessment. You will find all the necessary information on your P60 Form which was given to you by your employer around May 2020, after the tax year-end.

Student loan

Bear in mind that, if you have a Student Loan outstanding, you would have to indicate this on your self-assessment tax return by checking the relevant box. Student Loan repayment will only be calculated as part of your tax bill if your annual income was over the threshold which is applicable to you (£19,390 for Plan 1 loans and £26,575 for Plan 2 loans). More about Student Loan repayment here.

What else needs to be considered when completing your self-assessment tax return

You may also need to consider whether you have to include any of the following items in your self-assessment tax return:

  • Taxable State benefits (more about which benefits are taxable here)
  • State and private pensions
  • Pension contributions
  • Marriage allowance: If your income is less than your personal allowance (£12,500 for 2020/21) you may transfer some part of the allowance to your spouse.
  • High income benefit charge: This charge applies to you if you or your partner receive child benefit and earn more than £50,000.

The above list is not exhaustive. To learn more about filing your self-assessment tax return, read this in-depth guide

When you need to pay your self-assessment bill

Your Income Tax, National Insurance and, possibly, Student Loan bill for the tax year 2019/20 has to be paid to HMRC by 31 January 2021. If your tax liability happens to be more than £1,000 then you would also have to make two advance payments on account towards your next year’s tax bill. Each of these payments is equal to 50% of the previous year’s tax liability. The first payment is due by 31 January 2021 and the second by 31 July 2021.

A final word

By now, you should have a clear idea about how to complete your self-assessment tax return and the key points you need to consider. If, however, you still feel a bit unsure doing it yourself, feel free to get in touch and we will be happy to help!

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