What does Self Assessment involve, and who pays it?

Traditional employees have income tax deducted before they get paid by their employer. The Self Assessment system is in place to collect income tax from individuals who have earnings which can’t be taxed in this way – such as the self-employed and company directors.

Read on for important changes to tax deadlines as a result of COVID-19.

Who needs to submit a tax return?

It may seem a little bit unclear at first who must sign up for and pay tax via a Self Assessment Tax Return (SATR), but it’s actually quite simple.

If you were self-employed during the 2019-20 tax year, you’ll definitely need to sign up. The same goes for those who received over £2,500 in untaxed income: this could include rents from a property or tips in a restaurant. And if you received under £2,500, it’s a good idea to contact HMRC to check your status.

If you have a large savings pot or investment portfolio and your income was higher than £10,000 before tax, you’ll also need to register. People with dividends from shares above £10,000 before tax must also sign up, as must those who profited from selling homes, shares or certain other assets.

It’s also worth noting that those who were employed by an organisation but received a taxable income of above £100,000 also must sign up for self-assessment, even if they have already been taxed at source.

Contact your accountant or HMRC if you’re unsure about this requirement.

Finally, and most relevant to readers of this site – if you’re a company director you’ll definitely need to sign up and declare your income, too.

If you’re unsure, you can use this handy online tool on the Gov.UK website, which will determine whether or not you need to submit a SATR.

What are the deadlines?

When it comes to your Self Assessment tax return, there are a number of crucial deadlines you must meet in order to avoid a fine.

Tax years operate differently from calendar years. The last tax year began on 6th April 2019 and ended on 5th April 2020, and if you earned any untaxed income during this period, you will need to settle your tax liability via Self Assessment.

If you’re registered as self-employed or have to send a tax return for any reason, you need to register by 5th October 2020. This process can take a few days, so it’s wise to do it well in advance.

Any tax returns filled out on paper and posted to HMRC need to be sorted out by midnight on 31st October 2020, while any online tax returns need to be submitted by 31st January 2021. This is also the date that you need to settle the bill and pay your tax, too.

Please note that, as a result of COVID-19, you may be able to pay via instalments in 2021. See below:

COVID-19 changes to self-assessment payments

In October 2020, the Chancellor announced that taxpayers would be able to pay their 2019/20 self-assessment tax liabilities in instalments.

This means, rather than having to pay your entire 2019/20 tax bill by January 31st 2021, you will be able to pay the following liabilites in 12 monthly instalments:

  • Your second-payment on account for the 2018/19 tax year, which was due by July 31st 2020, if you have already deferred payment as a result of the earlier COVID-19 measure announced by the Chancellor.
  • Your full self-assessment payment for the 2019/20 tax year (usually due by 31st January 2021).
  • Your payment on accounts for the 2020/21 tax year (also usually due on 31st January 2021 and 31st July 2021).

You can pay in instalments providing that:

  • You owe £30,000 or less.
  • You don’t have any existing debts with HMRC

You can also pay a chunk of your tax right away, and the rest in instalments.

Find out more about paying in instalments here.

How to register

You can register online via the Government Gateway. However, before you can submit your numbers for the tax year in question, you must already have received a Unique Taxpayer Reference (UTR).

Given that the deadline for submitting your SATR is 31st January each tax year, you are strongly advised not to leave signing up for the online service until the last minute, as it may take a week or two for your UTR to be sent to your home address.

Using an accountant to submit your tax return

If the type of income you received during the tax year are fairly simple (just salary and dividends perhaps), you may find HMRC’s online submission tool simple enough. But if you have received income from multiple sources, or have complex tax arrangements, you may prefer to outsource the submission to an accountant.

Most limited company accountants will file your personal tax return for a one-off fee (typically between £100 and £200, plus VAT).

This may provide peace of mind that your tax calculations are correct, and minimise the chance of your return being challenged.

Bear in mind, however, that you cannot reclaim the cost of submitting your personal tax return against your limited company’s tax bill – as it is not a legitimate business expense.

Useful tips to remain stress-free

The best thing you can do to avoid stress at tax return time is to plan in advance and submit your SATR as early as possible (ideally before the 31st January deadline). That way, you won’t be left panicking when the deadline date is looming, when you should be concentrating on running your company.

You’ll be liable for a £100 penalty if your SATR is submitted up to 3 months late, and you will be charged interest if you also owe income tax. These penalties become more severe as time passes.

It is also a good idea to keep all of your tax records in a safe place for obvious reasons – including details of your salary (payslips, P60), dividend vouchers, bank and investment statements, and details of any benefits you received during the tax year – including child benefit.

Tax-efficient protection for directors

  • limited company life cover