Most freelancers will find themselves within the Self Assessment system and needing to submit a personal tax return for each tax year ending 5 April. Submitting an incorrect return to HMRC or missing a deadline can mean that interest and penalties are due, so it’s important to submit a correct return on time.

Who has to fill in a tax return?

The most common reasons why a freelancer will need to complete a tax return are where they:

  • Are a director of a limited company
  • Are a sole trader
  • Have income in excess of £100,000

As a rule of thumb, anyone with tax to pay outside of ordinary employment, pension income and small amounts of investment income tends to need to complete a tax return each year.

It is your responsibility – and it is an annual obligation - to let HMRC know if you need to complete a return. The deadline for notifying HMRC that you need to submit a return is 5 October following the end of the tax year (5 April) in which the income to be declared arose.

Who fills in the form and when?

You have to submit your return to HMRC by the filing date: that’s 31 October following the end of the tax year if you file on paper, or 31 January if you file online. You can fill in your own tax return although most freelancers ask their accountant to do it for them.

HMRC normally have until one year after the date of submission to enquire into your tax return.

What if I don’t file a tax return on time?

HMRC will charge a penalty of at least £100 if you file a return after the filing date (which, as detailed above, is different depending on whether you file by paper or online). If it’s more than three months late then daily penalties will also accrue of £10 per day up to a maximum of 90 days. There will be further penalties of 5% of any tax due for the return period (or £300 if greater) for prolonged failures, which arise after 6 months and 12 months.

Interest will also be due on any late-paid tax and HMRC are more likely to enquire into taxpayers who file late or incorrect returns. The Enquiry Window is longer where a return is submitted late.

What appears on the tax return?

Most individuals will need to declare all their worldwide income and capital gains on their UK tax return. You should take advice from an accountant if you believe you are entitled to exclude any non-UK sources from your tax return but aren’t sure.

The return will also contain any claims to which you are entitled, for example pension contributions and charitable donations made personally.

Will there be any tax due and how do I know how much this will be?

There is no need to calculate your own tax. If you file your tax return by paper before 31 October then HMRC promise to send you a calculation of how much tax is due by 31 January. If you file online HMRC will tell you how much you owe instantly as a tax calculation is shown automatically as part of the online submission process. Of course if you use an accountant they will tell you how much you owe and when to pay as part of drafting the tax return and can identify ways to save tax too.

If you owe additional tax then it is due 31 January following the end of the tax year. For example tax for the year ending 5 April 2012 will be due 31 January 2013.

If you have overpaid tax then it will be refunded to you reasonably promptly after filing the tax return but turnaround times by HMRC do vary depending upon the time of year. Refunds arising from returns submitted online will be processed quicker than those on paper returns.

There are two areas that tend to confuse freelancers when looking at Self Assessment and personal tax. The first is personal tax on dividends; the second is payments on account.

Personal tax on dividends

Most freelancers who work through their own limited companies will take dividends from their company. Dividends are normally the reason additional personal tax is due on a personal tax return for a freelancer.

If your total income is below the higher rate threshold (including all sources of income and dividends taken plus the 10% tax credit then there is no extra personal tax to pay on those dividends. But you must remember that the dividend received is the net, the 10% notional tax credit must be applied to the net to arrive at the gross income from dividends and this gross figure is used when considering the higher rate threshold. So £40,000 received in dividends would equate to gross dividend of £44,444 which is above the higher rate tax threshold of £42,475 for most tax payers in 2011/12) However, any dividends that take your total income above the higher rate tax threshold will result in an additional personal tax charge equal to 25% of the dividend. That 25% is based upon the dividend taken excluding the 10% tax credit.

Payments on account

Sometimes the tax payments are large enough for HMRC to ask for what are called payments on account for the following tax year (on the expectation that the tax liability will be at a similar level as the previous year). These payments are due on 31 January of the tax year in question and 31 July following and they are each equal to half the previous year’s liability. The final liability is then calculated as part of the tax return process and any balance (taking into account the payments you have already made) is paid by 31 January following end of the tax year together with the following year’s payment on account and so on.

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This article is written by James Abbott, Tax Partner at Baker Watkin.

To find out more about Baker Watkin visit their website: www.bakerwatkin.co.uk

Starting Out, Business Tax, Personal Taxation