What Is Self Assessment? How To Complete Your Self Assessment
If you are on your way of becoming self-employed or you are doing extra work aside from your main job, then you will have to start thinking about your Self Assessment.
If you have never done this before, then your first time could be very challenging. But there is no need to worry since we are here to help you in understanding the whole process.
Do you need to complete a Self Assessment? As a general rule, any person who obtained income that is not taxed at source must complete a Self Assessment. If you are a company director, in a business partnership, or a sole trader, then you are required to file a return. In case HMRC sends you a notice for Self Assessment, then you are legally required to complete it. There are a lot of reasons why you should complete a Self Assessment.
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What Is A Self Assessment?
Each year, numerous people in the UK are accomplishing their Self Assessment by January 31st every year. This includes accomplishing Form SA100 or Self Assessment which is commonly done online, although it is still fine if you file it with a paper form, which is the old fashion way.
By filing Self Assessment, HMRC will know how much National Insurance and Income Tax you have to pay. The income tax of employees is automatically deducted from their income through their employer’s PAYE system. However, this is not the case with self-employed workers or for any other kinds of income such as investments, income from savings, pensions or dividends. This is the reason why Self Assessment is very valuable.
What If I’m Just Doing Some Work On The Side?
One of the most popular ways of supplementing your income is by freelancing on the side. Most people choose to hide it from their employers. Nevertheless, although you do not want your employer to know about your other work, yet you can’t conceal it from the taxman, that is why you must register yourself as self-employed.
You must accomplish a Self Assessment so that the taxman will find out how much additional income you have earned and how much tax you are required to pay in addition to your monthly PAYE tax.
We are hopeful that those who began freelancing, contracting, or became self-employed prior to the start of the last tax year which is April 6, 2020, are speeding up since the deadline for Self Assessment will be on January 31, 2021, however, for those who are first-timers, here are some important information that you have to prepare.
Registering with HMRC
Before you can submit a Self Assessment tax return, you have to register with HMRC and let them know. You have to register by October 5th following the end of the tax year wherein you need to file a tax return. For instance, if you have to file for the 2019-2020 tax year, then you must register by October 5, 2020. If you failed to register on this deadline, then you will be charged with a penalty.
There are many ways to register, you can either do it by phone, by post or online. Just ensure that you allocate enough time for it in case something goes wrong. In registering, you will need your business and personal details as well as your National Insurance number.
After you are done registering, you will receive a Unique Taxpayer Reference (UTR) number from HMRC by post. Your UTR will be needed in registering to the HMRC Online Services. You will then receive a PIN number from HMRC by post. You will use this PIN number to access HMRC Online Services and file your Self Assessment. This process could have been much simpler by the time HMRC will start launching online tax services. But for now, you will have to rely on Royal Mail and get yourself registered at HMRC.
Once you have registered, there is no need for you to re-register anymore in the future. HMRC will send you a yearly reminder so you won’t forget filing your Self Assessment until such time that you will advise HMRC that there is no need for you to file anymore. Maybe because you have become a full-time employee or you have transferred abroad, for instance.
What Are The Benefits of Filing Your Self Assessment Online
It is greatly recommended that you should register so you can file online. Then, you must give yourself enough time before the deadline. Finally, use the online service to complete and file your Self Assessment or you could hire an accountant to do this for you online.
If you file them online, then you can take advantage of the following benefits:
For the online Self Assessment, the deadline is a bit farther compared to paper returns which need to be submitted by October 31st. The deadline for online submissions is January 31st for every tax year.
By filing your tax returns online, HMRC will instantly acknowledge it. This means you don’t have to worry if your Self-Assessment return will get lost in the post.
Your National Insurance contributions and the tax that you owe are computed automatically by HMRC and you can make some adjustments to your payments.
You can quickly get a copy of your own since you can save and print them easily.
If you want to check your account, then you can do it anytime. You can verify how much tax you owe and check any prior tax payments that you’ve made.
If you want your Self Assessment to be accurate when you file them, then one of the most significant things that you can do is to keep comprehensive records. It is very important that you should keep records of the following:
- Income from your employer. This could either be a P45 (if you left the company within the tax year)or a P60 and a P11D if necessary.
- Income from being self-employed. This can include the details of your business expenses and invoices.
- Income from Partnership
- Dividends you have obtained.
- Rental income
- Interest from your investments or savings.
- Foreign income
- Gift Aid
- Pensions contributions
- Any previous payments that you’ve made on your account (in case there is any).
- Income from Pension
- Any unemployment benefit or redundancy lump payment.
- Capital gains
If you are having some doubts about what records you need to keep, then you should talk to a specialist and ask for some advice.
How Much Income Tax Will I Pay?
Computing your income tax as a self-employed will include your profits in addition to any other income that you may have. You will be required to pay for the earnings that exceed the personal allowance based on your total income. In case you are working on the side or you are doing many jobs then HMRC would be interested in knowing how much income you have obtained from being self-employed. Your self-employment profits will be the remaining amount that is left after all the business expenses have been subtracted from your self-employment income.
Keep in mind that your self-employment profits could likely drove your total earnings into a higher tax band, in other words, you will be paying more tax. Always remember that you can offset all your business expenses from your self-employed work against your income from self-employment which can help in reducing your tax bill.
In case you are an employee, then the tax from your income through employment will be processed by your employer using the PAYE system. This means that you only need to worry about the tax that you owe through your self-employment profits as well as any other types of untaxed income that you have acquired, for instance, income from your investments or your property.
This may sound a bit complicated and perhaps it can be. However, no need to worry since HMRC can help you with the calculations. All you have to do is enter the amount that you receive in a particular tax year, this can be found on your P60. You also need to include the amount that you’ve earned through your self-employment. Afterwards, HMRC will inform you of the amount that you owe.
But Wait, What About National Insurance?
Actually, it is really not that simple! Although the National Insurance that you’ve paid for your income from employment has been handled by your employer through PAYE, yet if you are self-employed or both self-employed and employed, then you need to pay self-employed National Insurance based on your self-employed profits. HMRC will compute the amounts through your Self Assessment and be sure to pay them by January 31st every year together with any other Income Tax that you owe.
How Much Should I Put Aside For My Self Assessment Tax Bill?
If you are a sole trader, then it would be a great idea if you can save as much as 30% of all your earnings from self-employment every month. However, you might want to save more if your profits are quite high, for instance, if it reaches more than £60,000. If you choose to set up your business as a limited company then you can save some money since you will have to pay less tax. The following information can help you in deciding which is the best option for you, whether you will set up your business as a sole trader or as a limited company.
Although, in reality, you don’t have to pay 30% of your self-employed income, yet this is an excellent benchmark to guarantee that you can cover the tax you owe. There are a lot of people who are having trouble paying their tax bill since they don’t have enough cash.
One important thing to remember is that aside from paying your tax from the prior tax year, you are also required to pay half of the anticipated tax bill for the succeeding tax year. Also, don’t forget that you have to make a payment on account and its deadline will be on July 31st.
How Do I Fill Out My Self Assessment Tax Return?
Now here comes the fun part. You have registered with HMRC, you have obtained your logins and passwords, and essentially, you already have a rough estimate on the amount of tax that you owe, most importantly, you have enough cash to pay for it. The precise amount that you will need to pay on your self-employment profits will be calculated through an annual Self Assessment tax return, which you need to fill out online at Gov.uk.
We greatly recommend that you should fill out your tax return as early as possible. You can accomplish this anytime you want following the beginning of the tax year, as long as you have registered in HMRC and have obtained your UTR (Unique Taxpayer Reference) as well as your login information. You must not file it to the last minute since it could lead to a lot of stress most especially during the festive season. At the same time, if you were late in filing then you could be charged with fines.
After you have logged into the system, the process is not really that difficult, as long as you have kept appropriate records including expense receipts and sales invoices. Basically, you are simply filling out a form and the system will do the computations for you. In order to help you get ready for your Self Assessment, you should use accounting software so you are always on top of your bookkeeping.
Then What? How Do You Pay Your Self Assessment Tax Bill?
Be sure to double-check all the information that you’ve entered to ensure that they are all correct. When done, simply press “Submit” then relax. Afterwards, HMRC will inform you of the amount of tax that you owe. You can pay this amount through bank transfer or Direct Debit. If you want to know what are your other options for paying, just visit the Gov.uk website. One important thing that you should be aware of is that starting from January 2018, using a personal credit card in paying your Self Assessment tax bill is no longer permitted.
How To Defer Payment For Your Self Assessment Bill Because Of The Coronavirus?
When it comes to Self Assessment, the circumstance will be a bit different in January 2021. Although, you are still required to register and file your Self Assessment on their appropriate deadlines, yet the government proclaimed that they will allow taxpayers to delay their payments for their January 31st tax bill. They had previously declared that there will be a delay of July 2020 payments on account.
The government further stated that they will offer “Time to Pay” facilities dedicated to those who are having difficulties in paying their tax bills because of the coronavirus pandemic. If it is possible, then we always recommend that you should pay your entire tax bill on its usual date of January 31, 2021.
Keep in mind that this is simply a guide, taxes will change based on your individual circumstances. If you need more advice on this, then you can speak to us.