If you’re self-employed, a company director, or have received income during the tax year upon which tax is due, you have to complete a self-assessment tax return (SATR) each year.
For most contractors, completing a tax return shouldn’t be a complex process – especially if your accountant submits the paperwork on your behalf. However, you should be aware of some common pitfalls you may encounter along the way.
Registering for Self-Assessment
If you’re a company director or an umbrella contractor who has additional income to declare, the first thing you’ll need to do is register for self-assessment. Find out if you need to register here.
If you’re a limited company contractor, your accountant will typically do this on your behalf. Otherwise, read this GOV.UK guide on how to register.
Once registered, you will receive a Unique Taxpayer Reference (UTR), which you’ll need to keep in a safe place.
You should receive a notice to complete a tax return each year – typically in April or May. Of course, you’re responsible for completing a return each year regardless, so don’t assume if you don’t receive a letter from HMRC that you’ve been let off the hook!
The vast majority of taxpayers choose to use HMRC’s online services to submit their tax returns. However, before you can use the online service you’ll need an activation code. You should allow at least 7 working days before this arrives (in the post, to your home address), so don’t leave it until the last minute.
You can still fill in a paper return (SA100), but the deadline for completing this is 31st October.
The SATR itself
The complexity of your personal tax return will depend on your own financial circumstances. You will need to complete sections relating to:
- Income received from your main employment (typically your own limited company).
- Any supplementary employment income (e.g. your final employer before you went contracting).
- Dividend income (from your own limited company, and any others).
- Income from property (e.g. if you’re a landlord).
- Income from investments, including pensions.
- Income from benefits.
- Child Benefit income (which may need to be paid back if you or your partner earned over £50,000).
- Gifts to charity (if you’re claiming tax relief).
If you’re completing your return online, the HMRC system will calculate how much tax you owe automatically. If you’re submitting a paper return, HMRC will usually send you a tax calculation via the post.
If you have an accountant, they will typically provide you with a tax calculation and submit the return on your behalf. Be aware that your tax return is a personal expense, not a company expense. As a result, most contractor accountants either include completion of your personal tax return for ‘free’ or will charge you separately for the privilege.
Payments on Account
If you owe more than £1,000 the first time you complete a tax return, you will need to pay the equivalent amount (in advance) on the presumption that you’ll earn the same amount in the next tax year. Split into two, you will have to pay two payments in account each year. One by 31st January (to be paid with your main tax bill), and the other by 31st July.
If you’re new to contracting, this can come as something of a shock the first time you have to pay tax in advance, as well as paying tax on income you’ve already earned. Once you’re into the annual cycle, however, the pain is diminished.
If you earn less in one tax year than you did in the previous one, your payments on account will reduce accordingly, and if you have good reasons why you’ll earn less in the current year than in the one you’re completing your return for, you can apply for reduced payments on account.
The deadline for filing your tax return online is 31st January each year. Importantly, this is also the deadline for paying any tax you owe to HMRC. This means cleared funds must have been deposited in HMRC’s bank account, with your UTR code as a reference, by 31st January.
If you owe £3,000 or less, you can ask HMRC to collect the tax you owe by adjusting your tax code. Talk to your accountant or umbrella provider if this is something you wish to do.
COVID-19 deadline extension
Please Note: As a result of COVID-19 legislation, you can now pay any tax normally due by 31st January 2021 in instalments.
If you owe £30,000 or less, you can choose to pay an initial lump sum by 31st January, and spread the rest of your liability over the following 12 months.
If you miss the deadline, you will automatically receive a £100 penalty, regardless of the reason why your return was delivered late. After this, you’ll be charged £10 per additional day late, until you reach 90 days late (£900). Additional penalties are levied at 6 months and 12 months.
In addition, there are penalties if you fail to pay your tax liabilities after the 31st of January due date, as well as interest.
Read more in our dedicated guide to self-assessment penalties and fines.