There are around 11million self-assessment tax returns due by midnight on Friday 31 January. For some, they are are part and parcel of the return to the daily grind after the festive period.
But many remain clueless about whether or not they actually need to submit one to HM Revenue & Customs, particularly if they receive monthly pay packets via the pay-as-you-earn system.
With the help of some of the country’s top tax experts, we run through ten reasons why you – even as a full-time employee on PAYE – may need to submit a tax return by the all-important deadline, and avoid incurring penalties from HMRC.
This is not an exhaustive list of all the possible reasons you might need to submit a tax return. If you are not sure whether you need to submit a tax return by midnight on 31 January, it’s best to get some advice from an accountant or professional financial adviser.
Don’t be caught out: There are a string of reasons why you may need to file a tax return, even if you don’t think you need to
1. You run a ‘side hustle’
For a growing number of people, standard annual pay packets are insufficient to cover housing and living costs. Estimates suggest one in five people make additional cash alongside their main job.
‘Side hustles’ are growing in popularity and can cover anything from making and selling cakes for weddings, tutoring, babysitting or whizzing around as a takeaway delivery driver.
Some, but not all, side hustlers will need to register as self-employed with HMRC and will have to fill out a self-assessment tax return each year.
Got a side hustle? If alongside your everyday job, you do something like tutoring, you may need to submit a tax return
Speaking to This is Money, Rachel McEleney, an associate tax director at accounting giant Deloitte, said: ‘There may or may not be a tax return filing requirement, depending on the circumstances.
‘There is a trading allowance of £1,000 per tax year that can cover small amounts of trading income and/or casual earnings.
‘Casual earnings can include occasional services such as babysitting or sports coaching. If the amounts received are less than £1,000 (ignoring expenses), the income is not taxable. If a larger amount is received, it’s likely that a tax return will be required.’
2. You earn more than £100,000 a year
If you earn £100,000 or more a year, you may have to file a self-assessment tax return with HMRC.
Deloitte’s Ms McEleney said to This is Money: ‘Earning more than £100,000 per annum does not automatically create a requirement to file a tax return.
‘If the individual’s tax has been collected in full via PAYE, they are normally only required to file a return if HMRC have requested one.
‘It is HMRC’s policy to request tax returns from those earning more than £100,000, but if they have not done so the individual is not under an obligation to file one for this reason in isolation.’
Tim Sexton, a director at PwC adds: ‘Even if HMRC do not tell you to submit one, you may still need to file a return because your personal allowance starts to decrease above £100,000 and a tax return is the way to keep your tax affairs in order.’
If you’re raking in £100,000 or more, it would be prudent to seek the services of a financial adviser or an accountant who can help you take care of your tax matters.
3. You want to claim higher-rate tax relief on your pension
You may need to file a tax return if you are a higher earner and want to claim your full entitlement to the higher rate of pension relief.
Basic-rate taxpayers who pay 20 per cent income tax automatically receive 20 per cent tax relief on all pension contributions.
If you pay 40 per cent income tax, you are entitled to 40 per cent pensions tax relief on contributions, and 45 per cent rate taxpayers are entitled to 45 per cent pensions tax relief.
What is pension tax relief?
Put simply, when you save into a pension, the government likes to give you a bonus as a way of rewarding you for saving for your future.
This comes in the form of tax relief.
When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.
Tax relief is paid on your pension contributions at the highest rate of income tax you pay. This means, for example, higher rate tax payers can claim 40 per cent tax relief.
If you are a 40 per cent or 45 per cent taxpayer and contribute to a pension you automatically receive 20 per cent tax relief on your contributions to personal pensions and employer pensions.
But, in some situations, you will have to claim the remaining extra tax relief that you are owed from the government through a self-assessment tax return.
Deloitte’s Ms McEleney said told This is Money that while higher rate pension relief can be claimed via a tax return, ‘this is not the only method of obtaining relief.’
Ms McEleney added: ‘If someone is not otherwise required to file a return, they can write to HMRC with the details.
‘In straightforward cases, HMRC can issue a repayment of tax outside the self-assessment system.
‘Additionally, if the individual is an employee and is paying regular contributions that are expected to give rise to higher rate relief, HMRC can potentially factor the extra relief into the PAYE code.’
Meanwhile, Mr Sexton, of PwC, added: ‘If you are in a company pension scheme then higher rate tax relief probably comes automatically through your payroll.
‘But if you make personal contributions to a personal pension scheme, a group personal pension scheme or a self-invested personal pension (a SIPP) and you pay tax at 40% or more then you probably need to do a tax return, otherwise you could lose out on valuable tax relief.’
4. You make money outside the UK
This is quite a tricky area, but if you make money overseas you’ll often need to submit a tax return to HMRC. Making money overseas could take the form of a job abroad, an overseas pension, or income from foreign-based investments or savings.
Ms McEleney of Deloitte told This is Money: ‘Some foreign income might be tax-free in any event (e.g. the first £2,000 of dividend income is taxed at 0 per cent, whether it’s from the UK or abroad; if total dividends fall within the nil-rate band there is no tax to pay and no requirement to file a return).
‘Unless the income is tax-free, or the tax has already been collected via an adjustment to the individual’s PAYE code, a tax return is normally required.’
If you do need to submit a tax return, use the ‘foreign’ section of the tax return to record your overseas income or gains.
The rules dealing with overseas-derived income are pretty complex, so it pays to get some decent professional financial advice before delving into this area.
Tim Sexton, a director at PwC, told This is Money: ‘Just because it comes from abroad does not mean that it will not be of interest to HMRC. If you live in the UK then any income or capital gains arising overseas may need to be declared on a UK tax return, even if a foreign tax authority has already taxed it.’
5. You receive ‘High Income Child Benefits’
If you or your partner receive an annual ‘adjusted net income’ of over £50,000 and receive child benefit, you have to submit a tax return by midnight on 31 January this year. It doesn’t matter if the child living with you is not your own child.
The need to fill in a tax return in this situation stems from the government’s ‘High Income Child Benefit Tax Charge’.
The High Income Child Benefit Tax Charge is a tax charge designed to claw back child benefit.
The Chartered Institute of Taxation points out: ‘Adjusted net income is not necessarily the same as taxable income as there may be deductions you can make from your income when working out if you or your partner has exceeded the threshold.’
Child benefit: The High Income Child Benefit Tax Charge is a tax charge designed to claw back child benefit
On the issue of working out adjusted net income, Deloitte’s Ms McEleney said: ‘Pension contributions and gift aid donations may be deducted in arriving at adjusted net income.’
The CIOT added: ‘People affected by the charge are required to register to file a Self Assessment tax return (if they don’t already do so) – even if their only source of income is from PAYE. However, the charge may be collected via PAYE by means of an adjustment to a tax code.
‘It’s important to emphasise that it is the higher earner in a couple which has the obligation to file a Self Assessment tax return, not the lower earner, even if the lower earner is the one who receives the child benefit.’
A couple in this context includes two people who are living together as if they are married or in a civil partnership, as well as those who are actually married or in a civil partnership (unless separated), the CIOT said.
They added: ‘As a result it is possible for the charge to apply where your household income is just £50,100 (in the case where there is a single earner) whereas it is also possible for your household income to be as high as £100,000 and for the charge not to apply (if, for example, each partner earns £50,000).’
6. You let out space in your home or your entire home
The Government’s ‘Rent a Room Scheme’ lets you earn up to £7,500 a year tax-free from letting out furnished accommodation in your home. This could be anything from a single room, a whole floor or your entire property.
The £7,500 threshold is halved if you share the income with your partner or someone else. You cannot claim any expenses related to the letting.
People who, for example, run a bed and breakfast or operate as a resident landlord can opt into the scheme.
Got a room? The Government’s ‘Rent a Room Scheme’ lets you earn up to £7,500 a year tax-free from letting out furnished accommodation in your home
If you rent out your room or property and make over £7,500 a year, then you need to submit a tax return.
If the amount you earn from renting out the room is less than the thresholds of the Rent a Room scheme, then your tax exemption is automatic and you don’t need to do anything.
Deloitte’s Ms McEleney added: ‘Up to £1,000 of other property income can potentially be tax-free using the property allowance which works in a similar way to the trading allowance for the Rent a Room scheme.’
According to the Money Advice service, while the Rent a Room scheme sounds like a great way to earn extra cash, it can affect eligibility for some means-tested benefits, so tread carefully.
7. You’ve made some capital losses
We all know you’re taxed if you make capital gains, but it’s less well-known is that you can offset future capital gains tax if you make capital losses.
If you have made capital losses in a tax year and you declare them, they are first weighed against any other gains in the same tax year even if the gains are already covered by your annual exemption.
Once you have done this and you still have losses remaining, if you let HMRC know, you can carry the remaining capital losses forward.
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This way losses that have been ‘claimed’ can be used against gains made in a later year.
Deloitte’s Ms McEleney told This is Money: ‘If someone has made a capital loss on an asset, this may be set against current or future capital gains provided a loss claim has been sent to HMRC.
‘If the individual is required to file a tax return for other reasons, the loss claim would normally be made on the capital gains pages of the tax return. If the individual is not required to file a tax return, they can claim the loss by writing to HMRC and setting out the particulars.
‘Alternatively they could file a full tax return voluntarily, which would include all of their income for the year together with the capital gains pages.’
8. You’ve sold a hefty ‘chargeable asset’ like a house
You have to pay capital gains tax when you sell something worth a fair bit of cash, like a house or a stash of shares. These big ticket assets are known in the tax world as chargeable assets.
‘If someone has capital gains tax to pay, a tax return is always required’, Ms McEleney of Deloitte said.
Meanwhile, delving deep into the details, Mr Sexton of PwC told This is Money: ‘If you sell an asset for more than you bought it and so make a profit on the sale then that will be a capital gain.
Mind boggling: Within the UK, there are a huge number of reasons you may need to file a tax return
‘It could be subject to capital gains tax and, if so, you will need to declare it on your tax return.
‘Most assets are chargeable assets, i.e. within the scope of CGT but some are not. Your home is usually exempt if it is you principal private residence, but beware if you have used part of it exclusively for business purposes, have not occupied it recently or if the house and grounds are more than 5,000 square metres (about an acre) as then some CGT might apply.
‘Stocks and shares held within ISAs, private cars, and personal possessions worth less than £6,000 when you dispose of them (these are called chattels) are also exempt from CGT.’
You will not need to disclose gains on your tax return this year if the total value of all the chargeable assets you offloaded in the tax year was less than £46,800 and the total gains on those assets, before taking off any losses, was less than £11,700.
9. You’ve ploughed cash into venture capital schemes
The Government offers tax relief to people who put cash into venture capital schemes.
These schemes, like the Enterprise Investment Scheme, encourage people to invest in start-up companies and social enterprises which aren’t listed on any stock exchange.
If invest in them, you can claim income tax relief on your tax return for the year in which the shares are issued to you. In some instances, you can elect to shift the contributions back to the previous tax year. It’s wise to get professional financial advice about this.
Deloitte’s Ms McEleney said: ‘Like capital losses and higher rate pension relief, this can be sorted out via a tax return but doesn’t have to be. A standalone claim can be made to HMRC.’
10. HMRC say you need to file one
Occasionally, HMRC may send you a letter informing you that you have to file a tax return, seemingly out of the blue. While this may come as a surprise, the letter should certainly not be ignored and a return must be filed.
Your best bet is not to panic and gather all your payslips and paperwork together to submit your tax return. If there are any gaps or missing payslips, write to the relevant companies to get all the key paperwork re-sent to you.
Do you need to submit a tax return?
Iain McCluskey, a tax partner at PwC, has summed up the situations in which you may need to file a tax return.
Mr McCluskey told This is Money: ‘Generally speaking, if you earn £100,000 and above, are receiving income that is not taxed at source, realise a taxable capital gain, or want to claim tax relief for pension contributions or certain riskier investments, then a self assessment tax return will likely need to be filed.
‘George Osborne, as Chancellor, did declare the “death of the tax return” was coming but several years on, self assessment remains a key part of our tax system.
‘It is important for all taxpayers to understand when they need to register and file a return so to avoid expensive penalties for non compliance.’
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