Private Clients - 09 Dec 2018
Individuals who need to file a self-assessment tax return for the 2017/18 tax year should aim to file by 31 January 2019 to avoid late filing penalties. Even if you have not filed before you may still need to do so. Individuals who are newly self-employed are often unfamiliar with their UK tax filing obligations.
When will a self-employed individual need to file?
If you’re self-employed, you will need to complete a self-assessment tax return should you earn over £1,000, this is the case even if you make a loss. In the case of a loss, filing a return will be beneficial so that the loss can be offset against income or the current or prior year or carried forward to offset future profits. You will need to account not just for income but also for expenses and allowances to work out the net income that they’ll be taxed on. These are known as taxable profits and are the yearly earnings minus your allowable business expenses, capital allowances and losses.
Establishing an accounting period
Those who are self-employed can establish their own accounting period. Taxable Profits are worked out by reference to an accounting period of 12 months ending in the tax year. The simplest answer is to align your accounting period with the tax year but if you choose an accounting end date early in the tax year then you will, in theory, have more time to pay the tax on those profits. There are, however, special rules where a self-employed business first starts reporting its profits and the accounting period and tax year do not match which means that some of the same profits will end up being taxed in more than one tax year – special relief is providing when for this when the taxpayer ceases trading or moves their accounting year end closer to the tax year end.
Remember that if you do not correctly declare the profit that you or your business has earned or if you fail to register for VAT (not covered by this article) you may face penalties.
Tax return deadlines
For the first year, a self-employed individual will be taxed on profits earned from the date they started to the end of the first tax year, so this may not span a full 12 months. The tax in your second year will generally be charged for the first 12 months of profits. After that, the taxpayer will report profits by reference to the accounting year ending in the relevant tax year i.e. taxable profits for 2019/20 would be calculated by reference to 12 month accounting period ending in the 2019/20 tax year.
The UK tax year runs from 6 April to 5 April, and the profits you have made will need to be declared on your tax return. The filing deadline is 31 January following the end of the tax year for online submission. If you wish to file in hard copy you must do so by 31 October. Sending your tax return by 31 October means that you’ll have the advantage of HMRC working out your tax for you.
All tax due must be paid by 31 January after the end of the tax year to avoid interest and penalties.
Payments on account
In respect to profits of the second tax year and afterwards, self-employed individuals are normally required to pay estimated tax payments for the current year in two installments. These are known as ‘payments on account’ and the first is due on January 31 in the tax year concerned. Under normal circumstances, this is 50% of the income tax incurred in the prior tax year. A second payment of the same amount is due on July 31 following the relevant tax year (also calculated by 50%). If you owe more tax this tax year than you did in the prior tax year, a third balancing payment will be required and this will be due by January 31 following the end of the tax year- of course, if you owe less tax you can get a refund or look to use the overpayment to offset the first payment on account due for current year.
If taxable profits are set to decline, it is possible to agree reduced payments on the account but if when the tax return is filed it turns out that higher amounts should have been paid then interest will be charged.
If your tax liability (before payments on account) is £1,000 or less, or if more than 80% of your overall tax liability was paid via PAYE, a single payment can be made by the following January 31 with no need to make payments on account.
How to deal with losses
If you make a loss you can take some comfort that you will be able to obtain some benefit by carrying it forward and deducting it from any future profits you make in the same business. You may also be able to use the loss to offset your non-business income for the same or prior tax year.
If you believe that you may need to file a tax return please speak to a tax advisor as soon as possible.
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