I was discussing self-assessment with a friend last night, and decided to write an article setting out the basic points.
Submitting a tax return
Self-employed individuals, trustees and partners are required to submit tax returns. What normally happens is that HMRC sends out a notice after the tax year, requiring the taxpayer to submit a return of his income and gains in the tax year. The return must be accompanied by a self-assessment of the tax liability for the tax year. The date for submission depends on when the notice from HMRC is given. If the notice is given on or before 31 October following the tax year, the tax return must be submitted by 31 January following the tax year. The tax year runs from 6 April to 5 April. Here is an example:
The 2005/06 tax year ran from 6 April 2005 to 5 April 2006. If the notice from HMRC was sent on or before 31 October 2006, the submission date would be 31 January 2007.
However, if the notice from HMRC is given after 31 October following the tax year, then the return must be submitted within three months from the date it was sent.
The taxpayer may prefer to save himself the bother, and ask HMRC to calculate the tax liability. If so, he needs to submit the return a little earlier than is the case above. The submission date also depends on when the notice from HMRC requiring a return was given. If it was given on or before 31 July following the tax year, then he must submit the return by 30 September following the tax year. If given after 31 July, then the submission date is two months after the date the notice was received.
Late submission of return
There are penalties for late submission of a return.
If it is filed within six months after the filing date, there is a £100 penalty.
If it is filed within six and twelve months after the filing date, the penalty rises to £200.
If it is filed twelve months after the filing date, the penalty is £200 plus 100 per cent of the tax liability.
Payments on account
The taxpayer is sometimes required to make two payments on account of his income tax liability. The first payment on account is due on 31 January in the tax year, and the second, on 31 July following the tax year.
The following questions are important in order to determine whether payments on account are required:
- was the taxpayer charged to income tax in the previous tax year?
- if yes, did the income tax and Class 4 national insurance contributions (NICs) paid in the previous tax year exceed the amount deducted at source (eg PAYE).
The amount of the excess is called 'the relevant amount'.
Here is an example:
Mr A had an income tax liability and Class 4 NIC for 2005/06 of £10,500. The amount deducted at source was £50 in respect of bank interest.
The relevant amount is the tax liability (£10,500) less the amount deducted at source (£50), ie £10,450.
The payments on account are each equal to half the relevant amount.
Therefore, for 2006/07, Mr A is required to make two payments on account of £5,225 each. The payments are due on 31 January 2007, and 31 July 2007.
However, if 80 per cent of the taxpayer's tax liability was deducted at source in the previous tax year, there is no need to make payments on account. The tax not deducted at source is then paid at the time the return is submitted.
Also, if 'the relevant amount' is £500 or less, there is no need to make payments on account. It's not worth the hassle, both for HMRC and the taxpayer.
If a taxpayer feels his tax liability for the tax year would be less than the previous year's, he may apply for the payments on account to be reduced, or not to make any payments on account at all.
Interest is charged on late payments on account.
'Balancing payment'
When the time comes to submit the tax return for the tax year, the taxpayer must, at the same time, make a 'balancing payment'. The balancing payment is the amount of his tax liability for the tax year, less any payments on account which he has already made.
Interest is charged if the balancing payment is made late. In addition, there is a late payment surcharge.
The amount of the surcharge depends on how late the balancing payment was made, as follows:
- up to 28 days after the due date: no surcharge
- from the day after the 28th day to six months after the due date: the surcharge is 5 per cent of the tax outstanding.
- more than six months after the due date: the surcharge is 10 per cent of the tax outstanding.
The late payment surcharge applies only to the balancing payment. It does not apply to payments on account.
Conclusion
So that's a basic introduction to self-assessment. Any questions, kindly leave a comment, and I'll try to answer them.