Towards the end of the year, most of us start to think about completing our personal tax returns
Many contractors leave the chore of completing their tax return until the very last minute or even submit their forms late.
Here are some high-level ideas to help you avoid penalties, and complete your return accurately, whilst minimising any tax liabilities.
Get your return in on time
The deadline for submission of your annual tax return is 31st January. This date is also the deadline for paying any tax you owe for income received in the previous tax year to HMRC.
Failure to do so will result in a minimum £100 fine, with further penalties applicable for both late submission of the form itself, and for any unpaid taxes.
Submit your return online
Most people now submit their returns online. You can still send in a paper return (by October 31st), but HMRC is actively encouraging the online submission of all types of tax data, both personal and corporate.
If you complete your return online, the online system will help calculate your tax liabilities, and point out if you have made any obvious errors.
To use the online service, you will need to apply for an activation code if you have not done so before, and allow a minimum of 10 days for the code to arrive in the post.
You will need a Unique Taxpayer Reference (UTR) number in order to order an activation code. You will have received your UTR when you first registered for self assessment.
Find out more about filing online here
Use a professional
Most contractor accountants will complete the annual return on your behalf – either for a fee or as part of your monthly service package. If you have complex personal tax affairs, particularly, this could be a very useful service.
There is also a degree of reassurance that your return and tax calculations have been given the professional touch.
Ask your accountant how much this service costs.
Payments on account
As well as paying the total income tax owed for the previous tax year, you will typically also make two payments ‘on account’ for the current tax year, on 31st January and 31st July. If you believe your income is likely to fall in the current year, you can apply to reduce these payments on account.
There is an option to do so when logged into HMRC online, or ask your accountant to take care of this for you.
Tax losses and gains
You could save yourself a substantial sum if you invest some time in tax planning – ideally via your accountant.
You may decide to wait until the following tax year to draw a large dividend, for example, to minimise you higher rate liability for the current tax year.
The same logic applies to how you time other taxable gains, such as share sales, or income from other investments, including property.
If you have made CGT losses in previous years, you can carry over the losses to minimise your liabilities in future years.
Investing in a pension is another way to minimise your liabilities, as this represents one of the few remaining tax breaks available to contractors.
Accurate record keeping
Rather than waiting until late January to prepare your personal accounts, the process is always far easier if you keep accurate records on a monthly basis, for both your business and personal affairs.
The FreeAgent online accounting system is particularly good for limited company contractors, and most accountants can now integrate it with their own systems.
Visit HMRC Self Assessment online for further tax return information.