The Salary Calculator

Self Assessment rules refresh

by Madaline Dunn

As the cost of living crisis drags on, nearly 200,000 low-earners have been hit with HMRC penalties for failing to file their tax returns. This high figure is a reminder of the scale of confusion that surrounds Self Assessment.

At The Salary Calculator, we’ll walk you through the key information, to help safeguard you against being hit with tax-related fines. Below, we’ll explore and explain:

• How many penalties were issued and why,
• The rules around Self Assessment,
• HMRC’s response and upcoming changes

HMRC issues hundreds of thousands of penalties to low earners

Recent figures have revealed that between 2018 and 2022, HMRC handed out 660,000 fines to earners who didn’t owe any tax. Eleven million people are required to submit a Self Assessment income tax return to document their other sources of income or past income. Missing the submission deadline on 31 January, means people are automatically hit with a £100 penalty.

For the 2020-21 financial year, 184,000 people were fined for failing to complete a Self Assessment tax form by this deadline. These 184,000 taxpayers were paid less than £12,500 a year, meaning they were not subject to income tax. A total of 58000 of the 184,000 low earners who were fined were successful in their appeal, bringing down the total to 126,000.

Thinktank Tax Policy Associates (TPA) obtained the data following a FOI request, and found that 92,000 people among the lowest-paid 10% of the population were fined by HMRC in 2020-2021, while just 39,000 of the highest-paid 10% received fines.

Speaking about this, Dan Neidle, a tax campaigner and founder of TPA, said: “We believe the law and HMRC practice should change. Nobody filing late should be required to pay a penalty that exceeds the tax they owe.”

“People are falling into debt and, in one case we’re aware of, becoming homeless as a result of HMRC penalties. Advisers working with low-income taxpayers see this kind of situation all the time, and filing appeals for late-payment penalties often makes up a significant amount of their work.”

What are the rules and penalty charges?

So, what are the rules around Self Assessment that you need to adhere to in order to avoid being hit with penalties?

If, in the last tax year, any of the following applied, you must file a tax return:

• You were self-employed as a ‘sole trader’ and earned over £1,000 (prior to deducting anything you can claim tax relief on)
• You are a partner in a partnership business;
• You are a minister of religion;
• You are a trustee or the executor of an estate.

There are some other circumstances where you might also need to file a Self Assessment Tax Return. You can find out more about that here.

It is important that you register with HMRC for Self Assessment by 5 October, following the end of the tax year in which the income or gains first arose. If you fail to do this, you may be subject to penalties. This deadline is extended to 31 October for paper returns.

Other key dates include 31 January, which is the deadline for both submitting your online tax return and paying the tax that you owe.

The second payment on account is due 31 July 2023, and by January, if you still owe HMRC tax following your payment on account, you’ll need to pay a balancing payment.

If you miss the submission deadline, you will be hit with an automatic £100 automatic late-filing penalty.

If you fail to pay this for three months, the penalty can begin to increase by £10 each day, up to a maximum of £900 for 90 days.

At six months, a flat £300 additional penalty can be applied, or 5% of the tax due, whichever is higher, and if after 12 months you’ve not paid, you can incur another £300 penalty.

What was HMRC’s response and are there incoming changes?

Following a wave of criticism, an HMRC spokesperson released the following statement: “The government has recognised that taxpayers who occasionally miss the filing deadline should not face financial penalties, and has already announced reform of the system.”

So what reforms are set to be introduced? From 2026 onwards, the current standard £100 fine for late filing of Self Assessment tax returns will change to a points-based system.

According to HMRC, this will mean that those who make an occasional mistake won’t be hit with big fines straight away. Instead, those who miss the filing deadlines will be given a point, and a financial penalty will only be charged to them when a set number of points is reached.

The Government policy paper outlines that taxpayers will receive a point every time they miss a submission deadline, and HMRC will notify them when they receive a point.

When they reach a particular threshold of points, determined by how often they’re required to submit, a financial penalty of £200 will be charged, and they will be notified.

These thresholds are as follows:

• Annual – 2 points
• Quarterly (including MTD for ITSA) – 4 points
• Monthly – 5 points

As per these new rules, another £200 penalty will be issued for every subsequent late submission, but the taxpayer’s points total will not increase.

However, despite calls to reform the system further, the spokesperson said deadlines for returns are “necessary for the efficient functioning of the tax system,” adding: “We strongly encourage anyone who does not need to file a return to tell HMRC.”

“Our aim is to support all taxpayers, regardless of income, to get their tax right, and details of what to do if a person no longer needs to file a return are included in reminder letters every year.”

There are also further upcoming changes to Self Assessment, too. From April 2026, those who file Self Assessment reports each year and are self-employed, with annual gross income of over £50,000, will have to comply with the government’s new Making Tax Digital (MTD) for Income Tax rules. As per these rules, these taxpayers will have to keep records in a digital format, using specific accounting software packages or apps or maintain spreadsheets for recording business transactions.

Further, instead of a yearly report, people will be required to submit quarterly updates to HMRC. The deadlines for this will be as follows:

• 6 April to 5 July
• 6 July to 5 October
• 6 October to 5 January
• 6 January to 5 April

In addition to the quarterly returns, this will conclude with submitting an ‘end-of-period statement’ to confirm the final taxable profit for the accounting period.

From April 2027, those who file a Self Assessment tax return and are self employed, with an annual gross income of between £30,000 and £50,000 will be required to do the same.

Tags: HMRC, income tax, making tax digital, Self Assessment

Making Tax Digital for Income Tax – Should you start to prepare now?

by Admin

[Sponsored post by GoSimpleTax]

All VAT-registered businesses in the UK must now meet new reporting requirements introduced as a consequence of Making Tax Digital. If you don’t run a VAT-registered business, Making Tax Digital won’t have affected you so far. You may not have even heard of Making Tax Digital.

However, if you report income and pay tax via Self Assessment, come April 2024, Making Tax Digital is likely to impact you. And the changes that Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will bring are significant, so finding out more about MTD for ITSA now is recommended, so you’re better prepared and avoid having to pay a non-compliance penalty.

In this guide you can:

• Find out what Making Tax Digital for Income Tax Self Assessment is.
• Discover whether you’ll be affected by MTD for ITSA.
• Learn how MTD for ITSA will change the reporting of taxable income.

What is Making Tax Digital?

Making Tax Digital is an important government digital initiative that is already transforming the UK tax system. Its introduction got underway in 2019 and it will continue in stages until complete. The VAT reporting system has already been digitised and Income Tax Self Assessment is next, before Corporation Tax gets the MTD treatment. Full introduction of MTD across the entire UK tax system remains some years off.

Why is Making Tax Digital being introduced? The government says it wants to make it easier for people and businesses to more easily and efficiently manage their tax responsibilities, while it hopes MTD will prevent basic tax reporting errors that cost the UK many billions a year in lost tax revenue.

Introduction of MTD for ITSA was to start on 6 April 2023, but it’s been delayed for a year until 6 April 2024 in response to COVID-19 and stakeholder groups asking for more time so that businesses and individual taxpayers could better prepare themselves for MTD for ITSA.

Put in very basic terms, Making Tax Digital for Income Tax is simply a new way of using digital solutions to report income and expenses to HMRC every quarter rather than once a year.

Who will be affected by Making Tax Digital for ITSA?

• If you’re a self-employed sole trader or landlord who is registered for Income Tax Self Assessment and you have a gross income of more than £10,000, you’ll need to comply with Making Tax Digital for Income Tax requirements from 6 April 2024.
• Members of ordinary business partnerships who earn more than £10,000 a year must sign up for MTD for ITSA by 6 April 2025.
• You can apply for a MTD for ITSA exemption if it’s not practical for you to use software to keep digital records or submit them to HMRC digitally, for example, because of your age, disability, location (ie poor broadband connection) or another justifiable reason. MTD exemption can also be granted on religious grounds. You’ll need to explain your reasons to HMRC and an alternative solution will be sought.

How will reporting change under MTD for ITSA?

Sole traders, landlords and other Self Assessment taxpayers with taxable income won’t need to submit a Self Assessment tax return each year (unless they choose to report other income from shares, interest, etc, via Self Assessment, although HMRC would prefer you to report all taxable income via MTD for ITSA).

MTD for ITSA requires you to maintain digital records of your taxable income and expenses/costs, update them regularly and send summary figures to HMRC digitally within a month of the end of every quarter.

If you’ll need to report via MTD for ITSA you must use:

• MTD for ITSA-compatible third-party software or
• “bridging software” that allows you to send the necessary information digitally in the right format to HMRC from non-MTD-compatible software, spreadsheets, etc.

At the end of the tax year (5 April), you must submit your “end of period statement” (EOPS) and a final declaration (MTD version of the current self assessment tax return), confirming the accuracy of the figures you’ve submitted, with any accounting adjustments made and any additional earnings reported. HMRC will then send you your tax bill, which you must pay before 31 January in the following tax year. Unjustifiable late submissions or payments will continue to result in penalties.

Should you sign up for MTD for ITSA now?

For some time, some businesses, landlords and accountants have been taking part in a live Making Tax Digital for Income Tax Self Assessment pilot scheme. 

You don’t have to sign up for MTD for ITSA. However, you can sign up voluntarily now for MTD for ITSA and start using the service if you’re:

• a UK resident
• registered for Self Assessment and your returns and payments are up to date a sole trader with income from one business or a landlord who rents out UK property.
• You can’t currently sign up if you also need to report income from other sources (eg share dividends).

Need to know! At this stage, it’s probably best to delay signing up for MTD for ITSA, until at least April 2023.The new system is very much in its infancy, with HMRC taking steps to refine it to iron out any issues and provide a better user experience.

Conclusion

Preparation is key, starting to use digital software now to record income and expenses on a regular basis will get you into the routine before MTD for ITSA comes into effect.

As April 2023 approaches you will then be in a better place to decide what software or bridging software will be best for your circumstance/business.

About GoSimpleTax

Income, Expenses and tax submission all in one.

GoSimpleTax will provide you with tips that could save you money on allowances and expenses you might have missed.

The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way.

GoSimpleTax does all the calculations for you saving you ££’s on accountancy fees. Available on desktop or mobile application.

Tags: income tax, ITSA, making tax digital, Self Assessment, self employed, self employment, VAT

Changes to Self Assessment this year

by Madaline Dunn

The Self Assessment deadline is just around the corner, and by 31st January self-employed individuals must file and submit their Self Assessment tax return and pay any tax owed to HMRC.

While there’s still time to submit, it’s always best to complete your tax return as soon as possible, so you don’t risk making any silly mistakes and avoid getting hit with late penalties. Also, this year, there are some changes to Self Assessment to look out for.

At The Salary Calculator, we’ll walk you through:

• How to report Capital Gains Tax
• How to report Covid support measures
• How to access Self-serve Time to Pay
• What to watch out for

Capital Gains Tax reporting

Capital Gains Tax applies to those who have sold or ‘disposed of’ an asset, for example, a house that’s increased in value. From 6 April 2020 to 26 October 2021, this had to be reported and paid for within 30 days of completion. However, there is an update here, and for property disposals made on or after 27 October 2021, the “report and pay” deadline has been extended to 60 days.

If you’re registered for Self Assessment, it’s important to remember that you must report this on your tax return in the capital gains pages. That said, there are exemptions. If your only disposal is of your home and private residence relief applies, you don’t have to report this on the capital gains pages.

Reporting any Covid support measures

HMRC recently issued a warning to self-employed individuals that they must declare any COVID-19 grants they received on their tax return for the year 2020-2021. According to HMRC, over 2.7 million people claimed at least one Self-Employment Income Support Scheme (SEISS) payment up to 5 April 2021, and if you did indeed receive SEISS, this must be recorded.

Likewise, other Covid support measures that must be included in one’s Self Assessment are:

• The Coronavirus Job Retention Scheme (otherwise known as the furlough scheme)
• Self-isolation payments
• Local authority grants
• Eat Out to Help Out scheme

That said, it’s also important to note that if you received a £500 one-off payment as a working household receiving Tax Credits, this does not need to be reported in your Self Assessment.

Self-serve Time to Pay

For many, the last couple of years has been a struggle financially. In 2020, according to a study by LSE, over a third (34%) of self-employed workers struggled to pay for basic expenses such as rent and mortgage payments. So, if you’re feeling the pinch this year, you’re not alone. That said, for those feeling anxious and overwhelmed at their tax bill this year, there is help out there if you’re worried you can’t pay your tax bill in full. You can now spread your tax bill over a period of time online via HMRC’s self serve Time to Pay system.

The Time to Pay system is available to eligible to Self Assessment taxpayers who:

• Don’t have other outstanding tax returns or any other tax debts
• Have debts between £32 and £30,000
• The plan made must be set up no later than 60 days after the tax payment’s due date (30 March 2021)

When setting up your payment plan online, you’ll need to be equipped with:

• Your unique Tax Reference number
• Your VAT registration number, if applicable
• Your Bank account details
• Details relating to any previous payments you’ve missed

When arranging your payment plan, HMRC will ask you some questions about your financial circumstances to gauge what will be affordable for you. Questions may include how much you’re earning, what an affordable payment scheme would look like for you, what your outgoings are, whether you have any savings or investments.

What to watch out for

HMRC has issued a warning around ​​copycat websites and phishing scams ahead of the Self Assessment deadline. As the deadline approaches, scammers are more likely to target taxpayers who are in a rush to submit their tax returns and have their guard down. According to HMRC, 800,000 tax-related scams have been reported in the last 12 months alone.

Myrtle Lloyd, HMRC’s Director General for Customer Services, has subsequently published advice on what to look out for if you think you might be being approached by a potential fraudster. Lloyd says to be wary of anyone who contacts you claiming to be from HMRC and rushes you. Likewise, anyone “threatening arrest” will not be calling from HMRC. Lloyd outlined: “If you are in any doubt whether the email, phone call or text is genuine, you can check the ‘HMRC scams’ advice on GOV.UK and find out how to report them to us.”

Tags: coronavirus, Employed and Self Employed, Self Assessment, self employed, The Salary Calculator

All you need to know about UTR numbers

by Madaline Dunn

[Sponsored Post]

Self Assessment: It’s coming around to that time of year again. While some may have already completed and sent off their annual tax return, there are also many who have not! In 2020, 700,000 taxpayers waited until the last day to file their return, and a staggering 26,562 taxpayers left it to the last hour.

So, if you haven’t filed your tax return yet, and perhaps are doing so for the first time, you may have a few questions, including; what on earth is a UTR number?

Don’t worry; there’s still plenty of time to file your tax return before 31st January and make sure you’re not faced with late payment fines. At The Salary Calculator, in this article, we’ll get you to speed and explain:

• What a UTR number is
• When you need a UTR number
• How to register for a UTR number if you don’t have one
• What will happen after registering for a UTR number
• Where you can find your UTR number

What is a UTR number?

UTR stands for Unique Taxpayer Reference, and this is a 10-digit number that is unique for each person or business. Just as with a National Insurance (NI) number, once you have one, you have it for life. So, even if you’ve been out of business for a while, you’ll never lose your UTR number, your number will just become dormant.

A UTR number is issued by HMRC and sometimes includes the letter K at the end of it.

When do you need to provide a UTR number?

A UTR number is required if you:

• Need to create an online account with HMRC
• Are self-employed or have a limited company
• Owe tax on savings, capital gains, and dividends
• Must register individual taxes
• Work within the Construction Industry Scheme (CIS)

How do you register for a UTR number?

If you don’t already have a UTR number and need one, the most simple and fastest way to get one is to apply online on HMRC’s website.

Of course, not everyone’s preferred method involves a computer or laptop, so rest assured, you can also apply to get your UTR number via letter too. That said, this way is, unfortunately, much slower and will involve postage fees as well.

When it comes to registering for a UTR number, this must be done within the first three months of opening your business, regardless of your occupation.

In order to register, you must also submit a few different pieces of information. This information includes:

• Your name, DOB and address
• Your contact information (preferred number and email address)
• Your NI number
• When you commenced self-employment
• The type of business you have
• Basic business information (address, number, name)

What happens after registering for a UTR number?

Once you’ve applied for your UTR number, there are a few things to bear in mind. First of all, it can take up to ten days for your UTR number to arrive, sometimes longer.

In addition to this, once you’ve heard back from HMRC and received your activation code, don’t wait around too long before using it, as it expires at 28 days.

Where can you find your UTR number?

Your UTR number can be found in a number of places, including:

• Statements of accounts
• Your Self Assessment Tax Return
• HMRC payment reminders
• HMRC Self Assessment notices

If you think you’ve either misplaced or lost your UTR number, don’t panic. Contacting HMRC is your best bet. When reaching out to HMRC, you should have your NI number to hand, as you will be asked for it when you call.

HMRC can be contacted via:

• 0300 200 3310 (UK)
• +44 161 931 9070 (Outside UK)
• 0300 200 3319 (Textphone)

Final thoughts

Navigating the world of tax returns can be anxiety-inducing for some; that said, there are several sites out there that can lend a helping hand. HMRC are always available if you need guidance on your tax return and can answer any burning questions.

Go Simple Tax also helps to make things simple and straightforward. The software provides guidance, as well as hints and tips on how to save money.

Tags: Economy, Employed and Self Employed, Self Assessment, self employed, The Salary Calculator, UTR number

Should you register as a sole trader or form a limited company?

by Admin

[Sponsored post]

A key decision when starting a business is which legal structure do you choose when registering. The three most common options are sole trader, limited company and ordinary business partnership, although most people become a sole trader. Sole traders make up about 59% (3.5m) of the total UK business population of 5.9m, and they include many freelancers, contractors and agency workers.

Ordinary business partnership members make up about 7% (405,000) and basically these are sole traders who go into business together. The UK also has about 2m (34%) active private limited companies. So, why do so many people in the UK who work for themselves operate as sole traders?

What is a sole trader?

Being a sole trader is the same as being self-employed. In law, you and your business are the same thing, which makes you personally responsible for your sole trader business debts. If you don’t build up large debts and your business is successful, this won’t be an issue, of course.

To become a sole trader, you must register for Self Assessment (SA), the system (UK tax authority) HMRC uses to collect tax from sole traders. You’ll then pay Income Tax on your profits during the tax year (20%, 40% or 45% depending on your income/earnings). You work out your profits by deducting your expenses and any allowances from your income/earnings/sales.

Sole trader NICs

Most self-employed people pay their National Insurance contributions (NICs) via SA:

• Class 2 if your profits are £6,515 or more a year (£3.05 a week) and
• Class 4 if your profits are £9,569 or more a year (9% on profits between £9,569 and £50,270 and 2% on profits over £50,270 – all figures quoted are for the 2021/22 tax year).

Declaring sole trader earnings and VAT

Sole traders aren’t required to submit annual accounts to HMRC, but they must maintain accurate financial records (which can be checked) and submit details of their income and business costs in their annual SA100 tax return, which must be filed each year.

If your VAT-taxable earnings/turnover goes over £85,000 a year (the current VAT threshold) or you know they will, you must register for VAT. You’ll then have to charge VAT, collect it and pay it to HMRC. This also applies to limited companies.

The advantages of being a sole trader

It’s very easy to register online for Self Assessment so you can start your sole trader business. There are no costs and the process is very quick (minutes not hours or days). The tax admin is much easier when compared to a limited company, which means it can be done quicker. This saves cost, whether you do it yourself or pay an accountant to do it for you.

The paperwork and financial record-keeping requirements when you’re a sole trader are minimal; completing your SA tax return is more straightforward and any losses you make can be offset against other income.

Many customers won’t care whether you’re a sole trader or not, as long as your prices, products and/or services meet their expectations. In any case, you can easily change to a limited company structure later if you wish. And sole traders can employ others and their businesses can grow and prosper.

Being a sole trader can give you much more flexibility and control over your business, because you’re not answerable to shareholders – and you won’t have to share your profits with them either. You will enjoy more privacy, too, because the annual accounts of limited companies must be published on the Companies House website, which means anyone can view them. Sole traders do not have to publish their annual accounts.

Sole trader v limited company: which is more tax-efficient?

Example 1

Sole trader profit = £50,000 Net income = £38,717

Ltd co profit = £50,000 Net income = £40,109

Difference = £1,392

 

Example 2

Sole trader profit = £100,000 Net income = £67,752

Ltd co profit = £100,000 Net income = £69,469

Difference = £1,717

 

Example 3

Sole trader profit = £150,000 Net income = £91,723

Ltd co profit = £150,000 Net income = £92,057

Difference = £334

 

These examples assume that all profits are extracted from the business, salary up to Secondary National Insurance threshold (£8,840) is taken and the remainder paid as dividends (2021/22 rates).

Conclusion

As the above examples show, operating as a limited company can reduce your tax bill. However, if you need to pay an accountant each month to look after your tax admin and complete your annual accounts and Corporation Tax returns, in reality, any financial advantage as the director of a limited company can be minimal or non-existent.

Each year, hundreds of thousands of people in the UK who decide to work for themselves register as a sole trader and many go on to establish and grow highly successful small businesses. In many ways, being a sole trader is the easier and cheaper choice and it need not hamper your business or your ambitions.

About GoSimpleTax

Income, expenses and tax submission all in one. GoSimpleTax will provide you with tips that could save you money on allowances and expenses you might have missed.

The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way. GoSimpleTax does all the calculations for you so there is no need for an accountant. Available on desktop or mobile application.

Try for free – Add up to five income and expense transactions per month and see your tax liability in real time – at no cost to you. Pay only when you are ready to submit or use other key features such as receipt uploading and HMRC direct submission.

Tags: Employed and Self Employed, Self Assessment, self employed, self employment, tax return