The world of self-assessment tax returns may appear somewhat confusing, particularly if you are a self-employed professional. For that reason, this post provides a simplified guide on how best to prepare your return for the 2023/24 tax year. From personalizing your return to the calculations you will need to make, we have you covered.
Understanding Self-Assessment Tax Returns
A self-assessment tax return is a HMRC form used for income tax collection. It is very crucial, if you are self-employed, to understand how this form should be filled out correctly. By the process of self-assessment, you show your income, expenses, and any other relevant financial information concerning the applicable year of assessment.
For the tax year from April 6, 2023 to April 5, 2024, your online return can be submitted by January 31, 2025. It is always good to note this date for avoidance of some fines.
Customizing Your Tax Return
Before you go into the detail of your self-assessment, it's necessary to tailor your return so that it reflects your personal circumstances. This involves logging into the Government Gateway and confirming all of your personal information, such as address and National Insurance number. It is this tailoring process which ensures that the right sections to do with your particular circumstances will be generated in the tax return.
Confirm Employment Status:
If you had employment in the tax year, this is a confirmation, and you would be assured that HMRC will also be in possession of such information.
Declare Self-Employment Income:
You are supposed to complete the self-assessment if the total turnover from all your self-employments in the year exceeds £1,000. If it's below, then you may well not need to file a return.
Business Details:
Provide the name of your business, along with confirmation of whether you are in a partnership or not.
Self-Employment Section
As you customize your return, you will be taken to the self-employment section of the return where you will have to provide details of both your business income and your business expenses.
Income and Turnover
Simply input your annual turnover to get started. If this is below the VAT threshold of £85,000, then you may well not need to register for VAT. For instance, if your annual turnover was £70,000, then just pop that figure in.
Expenses
Next you must declare your allowable business expenses. You can itemize these or you can just put in a total to keep things easy. Some of the most common categories include:
- Cost of goods sold
- Travel expenses
- Wages and salaries
- Rent, rates, and utilities
- Repairs and maintenance
For example, if your total expenses are £20,000 input this number. This will give you your net profit, which is your turnover minus your expenses.
How to Understand Capital Allowances
The cash basis system doesn't allow capital allowances on all assets but those used in a business operation. For example, you can only claim capital allowance for motor vehicles used for business operations. Take all the capital allowance section blank if you adopt the cash basis.
Calculating Your Tax Liability
Having typed in your income and expenses, the next thing you have to do is work out what your tax liability is. It basically means working out how much tax one owes based on one's taxable profit.
Your taxable profit is your net profit after considering the personal allowance. This is £12,570 for the 2023/24 tax year. So, if your net profit was £50,000, for example, then your taxable income would be £37,430 (£50,000 - £12,570).
Next, there is income tax at these rates:
- 20%: The starting rate to £50,270
- 40%: Income over £50,271
As well as income tax, you will also have to make payments in respect of National Insurance contributions. Class 2 and Class 4 National Insurance contributions are computed on your profits, and these need to be added to your overall tax liability.
Payment on Account
HMRC requires self-employed individuals to make payments on account. These are advance payments of tax payable towards your next year's tax liability and are calculated based on your current year's tax liability. Where the total tax due for the year is £11,356, a payment on account of 50% amounts to £5,678, which has to be made by January 31, 2025.
In July, you will make a second payment on account based on the previous year's tax liability. In this way, the system helps to spread your tax payments throughout the year.
Final Steps Before Submission
Before you submit your return, check through all the entries: that all figures are correct; that you have allowed for all your income and expenses. You would log onto the Government Gateway when you submit your return online.
You will then receive confirmation from HMRC once submitted. It is advisable that you print off a copy of your return for your records, because you may need it in the future or in case of an audit.
Seeking Assistance
If you find this process too much to handle, then you may want to consult with a tax professional or an accountant. They can advise you with very valuable information that will ensure that your return is completed correctly and can possibly save you money in the long run.
If you do not want to seek paid assistance but would like to do your taxes yourself, then there are many resources and even tax calculating software online to make it much easier.
The thought of filling in your self-assessment tax return can be pretty daunting when you are self-employed, but it is very often much easier once it is broken down into smaller steps. Knowing how to tailor your return, complete the necessary sections, and work out your overall liability will go a long way toward helping you approach this task with confidence.
Remember, a little housekeeping throughout the year will make this time of the year not as dramatic. Keep a record of your income and expenses, and do not be afraid to ask for help if you need it. Good luck with your self-assessment!