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Tax allowances to consider when completing your Self-Assessment Tax Return

Posted: 19th November 2019

When completing your Self Assessment Tax Return (SA) there are other things you will need to consider in addition to your profits from self-employment, including other income such as a pension, employment or savings.

There are also tax allowances and tax reliefs which you may be entitled to which could reduce your tax bill.  Here are the main tax allowances you should consider when turning your attention to your SA.  With the deadline fast approaching in January, are you ready to take advantage of the tax allowances available to you?

Personal allowance

The personal allowance is the tax allowance that most  people will be familiar with.  If you live and work in  the UK you receive a personal allowance on your income, currently set at £12,500 in the current tax 2019/20.   This means that you can earn £12,500 before you are due to pay any tax to the taxman, and this is true for both employed and self-employed individuals.

Any income above the £12,500 personal allowance threshold is subject to income tax and the more you earn, the higher the amount of income tax you pay.   For those individuals whose income exceeds £100,000, there is a tapering of the personal allowance and it is eliminated completely when income exceeds around £123,000 per tax year.

Trading income allowance

The Trading Income Allowance was introduced recently in 2017 and allows individuals to earn tax-free income of £1,000 from trading activities, for example from selling goods or from casual work completed over the tax year.

Therefore, if you earn less than £1,000 in a given tax year you do not need to notify HMRC via a SA or indeed pay any tax.

When your income exceeds £1,000, you can make use of the trading allowance first before you start to deduct allowable business expenses. You do not necessarily have to utilise the trading income allowance in place of submitting business expenses; this may depend on your individual circumstances, but £1,000 is available to use every tax year.

If you are unsure of the best course of action for you, Mirandus can provide expert tax advice to help you make the most of the tax allowances available to you.  Contact us to see how we can help.

If you have more than one trade or you earn trading income and any other income, you will only receive the trading income allowance once.  You can, however, decide to use the trading income allowance over several of your businesses or income streams and decide on the monetary split between your sources of income stream in a given tax year.

Please note that if you make a trading loss we do not advise you to use the trading allowance, but instead you can potentially claim loss relief and you will need to complete a SA.

Pension Contributions

You may already, or want to make, contributions to a personal pension scheme.  A personal pension scheme is different from the state pension scheme, which you automatically make contributions towards via your National Insurance (NIC) contributions.

Making pension contributions from the income you earn is a good way to benefit from tax relief.  You do need to let HMRC know you are paying into a personal pension scheme directly but  the monetary amount should be noted in your SA each tax year.

When you pay into a personal pension scheme, you could already be benefiting from tax relief when you make your contributions.  For example, you may be paying £50 a month, or £600 a year, which is paid after you have paid income tax at 20% on income you have earned.  Your pension provider should then claim back the 20% income tax already paid on your behalf from HMRC, in this example it would be an additional £150 per month, which is an uplift to your contributions of a total of £750 for the year.  This is called ‘tax relief at source’.

If you think you are not receiving tax relief at source you can claim for it on your SA each tax year, subject to certain criteria.

Mirandus Accountants can help you navigate through the various tax allowances available to you when completing your SA.

When do you pay any income tax due after completing your SA?

You only pay income tax and NIC when you have made a profit.  To make a profit in the taxman’s eyes, you have extra income after you business expenses and capital allowances.

If you plan to complete a paper SA, which has a deadline for filing of 31 October following the end of the tax year in question, HMRC will work out the tax due and send you a SA302 form.  This form, which includes your full tax calculation for the tax year, may be required if you apply for a loan or mortgage, so an important document to retain.

If you file your tax return online, allowing you more time for completion with a deadline of 31 January following the end of the tax year in question, HMRC will automatically calculate any tax due and the tax calculation can be viewed and print via your online HMRC Online account.

Unless you are due to make a  ‘payment on account,’ then you are due to pay your tax bill by the 31 January, the same date as the hard deadline for submission.  It therefore pays to complete your tax return early so you have more time and visibility to pay your tax bill.

Mirandus offer a Self-Assessment Package for self-employed individuals and Directors of Limited Companies and as a Charted Tax Advisory practice, we are well placed to provide expert tax advice and ensure you benefit from the tax reliefs available to you.

Payments on account

Payments on account are only applicable from your second SA onwards where HMRC may ask you pay tax in advance for the following tax year.  There are some instances where you do not need to pay a Payment on Account, such as:

• When your income is less than £1,000.  In this case, you also do not need to complete a SA

• At least 80% of your total tax bill has already been paid via employment through Pay As You Earn (PAYE) and Construction Industry Scheme (CIS) deductions

HMRC calculate forward tax year payments basing their calculation on your previous year’s tax bill, and you will be asked to pay half of this on 31 January, with your full previous year’s tax bill.  The good news is that this payment on account payment does not include student loan payments or NIC Class 2 payments.   Payment on Account payments only include income tax and NIC Class 4 contributions.

By way of an example, if you are due a Payment on Account payment for the 2018/19 tax year, the following payments will be requested from HMRC:

• 50% of the 2018/19 income tax and Class 4 NIC calculation by the 31 January 2020 (so before the end of the 2019/20 tax year)
• 50% of the 2018/19 income tax and Class 4 NIC calculation by the 31 July 2020 (so after the end of the 2019/20 tax year)
• Balancing payment for the 2019/20 tax year by the 31 January 2021 (plus the first payment on account for the 2020/21 tax year).

HMRC  will let you know if you are due a payment on account and the amount due.  You can also see this for yourself by logging on to your HMRC Online account.

If you expect lower profits than those of the previous year, then you can apply to HMRC to reduce the payments on account you make in the current tax year. You can apply to reduce your payments on account any time before they are due using form SA303 (either posting a paper version of the form or applying online). If you reduce your payments on account too much then HMRC may apply interest on the amount that should have been paid, from the time it was due until it is actually paid. HMRC may also charge a penalty if the reduction to the payment on account is considered excessive.

We take the pain out of Self Assessments

At Mirandus Accountants, we understand what it is like to be a small business owner, as we are a small business ourselves.  As a chartered tax advisory practice, we are experts in tax, and as reflected in our testimonials, we provide tax expertise with empathy and understanding to your own unique set of circumstances.

We are available right now to help you complete your tax return early so you know how much tax you need to pay and by when.

Business Comment

Business Comment is the Edinburgh Chamber of Commerce’s bi-monthly magazine. It provides insight on Edinburgh’s vibrant business community, with features on the city’s key sectors, interviews with leading figures and news on new business developments in the capital.
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