Start-Up Guide (8) – How does the self-assessment tax process work?

If you become self-employed or a director of a limited company, you will need to complete a self assessment tax return every year.

The first step is to register with HMRC. It’s best to do this as soon as you start your business, but at the very latest, you must register by 5 October of the end of the tax year for which you need to complete a tax return.

The tax year runs from April 6 to April 5 the following year, so if you become self-employed in July 2020, you will need to submit a tax return for the 2020/21 tax year. In this instance, you must register for self assessment with HMRC by 5 October 2021, at the very latest. If you fail to do so, you might be fined.

When you have registered, HMRC will issue you with a Unique Taxpayer Reference or UTR. This will be on all documentation you receive from HMRC and you will be asked for it whenever you contact them.

As the name implies, when you complete a self assessment tax return, you are responsible for working out how much tax you have to pay.

If you’ve never completed a tax return before, it can be a confusing and time-consuming process. If you make any errors you might pay too much, or too little tax.

Pay too much and you will be out of pocket, pay too little tax and HMRC could hit you with a penalty. It’s therefore easy to see why most small business owners outsource this to their accountant, who will be familiar with all the intricacies of a tax return.

Keep your financial records up to date

There is one thing above all to remember here: keep your financial records, both income and outgoings, as up to date as is humanly possible. If you stick to this mantra, filling in your tax return won’t be half as bad as you’re imagining it to be.

Collect all of the relevant paperwork that you’ll need to complete your return. This will include bank and building society statements, and business income and expenses.

If you are an employee, and many people starting their own business do it part-time while continuing working for someone else during the day, you will need your P60 form which you get from your employer every year.

You will also need a P11D if you receive taxable expenses or benefits. If you’ve changed jobs during the tax year, you should also have a P45 part 1A.

If you are self-employed, you will need your accounts detailing your revenue for the year plus business expenses. You only pay tax on your business profits, although the rules are complicated and your accountant will advise you.

If you are a limited company director, you will need to have details of all your salary and dividend payments.

Complete a paper tax return or file it online?

There are two main advantages of filing your tax return online. Firstly, the tax you need to pay will be worked out for you automatically. This significantly reduces the chances of a calculation error and paying the wrong amount of tax. The other benefit of filing online is that you have longer to submit your return.

The vast majority of individuals file online these days.

Deadlines for submitting tax returns are pretty strict. Our advice is to get it out of the way as early as you can. Remember filing your return promptly doesn’t mean you have to pay your tax any earlier.

The key self assessment deadlines

There are three main deadlines for you to remember;

October 31st: paper return

If you prefer to do your return on paper, you must send it to HMRC by this date. Your tax is then calculated by HMRC, and they will send you the bill by the January 31 deadline.

If you owe tax of under £2,000 and want it to be collected through your PAYE code, rather than have to make a lump sum payment, this is also the deadline for you.

If you haven’t worked out yourself what tax you owe and send your return in after this date, your tax will be calculated for you, but there is no guarantee that HMRC will tell you what to pay by January 31.

January 31: final deadline

This is the big one; and the one that gives accountants a headache every year. All tax returns must be in by January 31st, or you’ll get an instant £100 fine.

Every year, thousands will be in a frantic rush to meet this deadline. Why leave it to the last minute, when you can do it as early as the summer before?

For a selection of more detailed guides on all aspects of tax, visit our Tax & Accounting section.

On to ByteStart’s Start-Up Guide – Part 9 – Accounting for your new business
Back to the ByteStart’s Start-Up Guide Index

Last updated - 11th October, 2019

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