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17 Jan 2022

Eight mistakes to avoid on your first self-assessment tax return

100,000 taxpayers could be filing for the first time this year

HMRC is expecting around 12.2 million people to submit tax returns this year, up from around 12.1 million last year - meaning there'll be around 100,000 taxpayers who could be filing for the first time.

It can seem like a bit of a daunting process if you haven't dealt with your tax affairs before, not least because making a careless mistake could land you with a fine from HMRC.

Here, Which? goes through eight mistakes first-time filers will want to avoid when submitting their tax return - and explains what you should do instead.

1. Leaving it too late to register with HMRC

If you've never filed a tax return before, you need to register with HMRC. The official deadline for 2020-21 returns was 5 October 2021, but there's still time to register.

This process can take a good couple of weeks, so get started as soon as possible.

In order to file your return, you must have applied for and received your Unique Taxpayer Reference (UTR) number. It can take around 10 days for it to arrive through the post - and another 10 days for your vital activation code that will enable you to get into your online tax account.

HMRC will sometimes give an extended deadline of three months to send your return from when you register, but if it doesn't you may get a fine - as well as separate charges if you're late paying the tax you owe.

However, the tax authority is waiving late filing charges for 2020-21 returns in February - but 2.75% interest will still be charged on the unpaid tax from 1 February.

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2. Not having a plan to pay your tax bill

To avoid being charged interest on your tax, your payment must reach HMRC by 31 January. That's a Monday this year, so some forms of payment may take slightly longer.

In particular, anyone who wants to pay by direct debit for the first time may find it takes up to five working days to go through - meaning the payment would need to be set up almost a week before the deadline.

If you're not able to pay the tax you owe, you might be able to set up a Time to Pay arrangement - this must be done by 1 April 2022 at the latest, and the following points must apply:

  • you owe less than £30,000 in tax
  • you've filed your 2020-21 tax return
  • you don't owe HMRC any other funds
  • you plan to pay the tax you owe in the next 12 months.

3. Not including all income sources

You must include all types of income on your tax return, as it has a bearing on the rate of tax you need to pay for things like capital gains tax and dividend tax.

In addition to what you've earned from employment or self-employment, you'll also need to declare money earned through:

  • rental income
  • profits earned after selling valuable items (capital gains)
  • savings or investment income over £10,000
  • pension income
  • tips or commission
  • taxable income from abroad
  • income from investments in company shares (dividends).

In addition, you'll need to declare any funds received from the self-employed income support scheme, as well as 'donations' from sites like Patreon and Twitch.

Don't forget about child benefit

If you receive child benefit and you or your partner earn £50,000 or more, you might have taxes to pay.

The high-income child benefit charge equates to 1% of the child benefit paid for every £100 of income between £50,000 and £60,000.

4. Choosing the wrong accounting method

There are two types of accounting methods you can choose from - 'cash basis' or 'traditional accounting'.

Cash basis is when you record income and outgoings that have actually entered or left your account. This tends to be more suited to sole traders or small businesses, as you don't have to pay tax on cash that you haven't received yet.

Traditional accounting is when you record money that's been invoiced - so even if funds haven't actually been paid into your account yet, you'd report it as though they had.

This method of accounting is more suited to larger, more complex businesses.

5. Forgetting about tax-free allowances

Make sure you're clued up about tax-free allowances - some only apply to people with certain circumstances, and not all of them will be applied to your income automatically.

For instance, you might choose to apply the £1,000 trading allowance to income earned from activities such as selling items on eBay; similarly, there's the £1,000 property allowance that can be applied to money earned from your home. You'll have to opt in to use these allowances on your tax return.

If you and your partner are eligible for the marriage allowance, you must apply for this from HMRC. It's a tax break for couples that could save up to £252 each year.

If you or your partner were born before 6 April 1935, you may be eligible for the married couple's allowance.

Find out more: tax-free income and allowances

6. Not claiming allowable expenses

The money you've spent for work purposes may be claimed as an expense to reduce your tax bill.

This differs depending on whether you're employed or self-employed.

If you are an employed worker you can get tax relief on your expenses, as long as you haven't been reimbursed by your employer.

This can be for things like business travel, uniform expenses and professional subscriptions. The tax relief will be incorporated into your tax code if you pay tax via PAYE.

If you're self-employed you can deduct the expenses from your profits, reducing your tax bill. You can make additional claims, such as for money spent to run business premises, and expenses arising from your employees.

Note that you can't apply expenses for trading or property income if you've already applied the trading or property allowances.

7. Failing to keep your records

After you've filed your return, you must keep your records in case HMRC asks for proof of what you've included on your tax return.

This includes things like receipts, invoices, bank statements, and other documentation like a P60 or P45.

There aren't specific rules on how to keep your records - but HMRC can charge penalties if records aren't accurate, complete, and readable.

Records must be kept for at least five years from the 31 January following the relevant tax year (so, 2020-21 records should be kept until at least 31 January 2027).

However, HMRC can open investigations into fraud up to 20 years after a tax return is filed, so you might want to hang on to your records for longer.

8. Not planning early for next year

It can really pay to file your tax return early; not only can you avoid any rushed mistakes, but you can work out how much tax you owe way ahead of the payment deadline.

This is particularly important for self-employed workers, as they'll likely need to pay tax via payment on account after their first full year of business.

Come 31 January, this will mean paying the tax you owe for the tax year that's ended, plus half of the estimated tax bill for the current tax year.

You'll then pay the second half of the estimated tax on 31 July. Depending on how your tax return matches your tax estimate, the following January might see you paying more tax, or you might be due a refund.

Consider using the Which? tax calculator

Filing your tax return for the first time can seem a bit daunting - so online tools like the Which? tax calculator can be a good way to tot up the tax you owe.

It's easy to use, jargon-free, and even suggests expenses and allowances you might have forgotten.

When you're finished, you can even use the tool to submit your tax return directly to HMRC.

Try it for yourself at which.co.uk/money/tax-calculator.