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24 Jan 2021

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

Filing an inaccurate tax return could land you with a fine from HMRC

Around 12.1million people are due to submit a tax return to HMRC this year, up from the 11.7 million due last year - that means around 400,000 taxpayers could be filing for the first time.

If you've never had to declare your income before, it can seem like a daunting process

Here, Which? goes through seven potential mistake first-timers could easily make so submitting your tax return can go smoothly.

1. Not applying for your UTR number in time

At this point in January, time is seriously running out to set up your self-assessment account with HMRC.

That's because, in order to file, you must have applied for and received your Unique Taxpayer Reference (UTR) number - and it can take around 10 days for it to arrive through the post, with up to another 10 days for your vital activation code to get into your online tax account, so if you haven't applied yet it might already be too late.

Officially, you need to register for self-assessment by 5 October - while there's no fine for not doing this on time, registering after this date can mean you'll get a fine if you miss the tax return deadline as well as separate charges if you're late paying the tax you owe.

If you haven't registered yet, you can work out how much tax you need to pay and submit payment by 31 January without a tax return, using this HMRC form.

HMRC will sometimes give you an extended deadline of three months to send your return from when you register, but if it doesn't, you will be charged a penalty of £100 on the first day and an increasing amount after that.

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2. Not being ready to pay your tax

HMRC has announced it is waiving fines for late filers in February. However, the deadline to pay your 2019-20 bill is still 31 January. Read our news story for more.

This has to be paid in one go unless you've set up an alternative payment arrangement with HMRC.

The government has extended the eligibility criteria for its Time to Pay arrangement due to the coronavirus pandemic, meaning you may be able to split your tax payments over 12 months to January 2022.

It may be suitable if you owe less than £30,000 in tax and have submitted your 2019-20 tax return, but note that you'll be charged 2.6% interest for any overdue tax from 1 February 2021, even if this arrangement is in place.

Which? research has found that one in four plan on delaying payment using the Time to Pay scheme this year.

3. Being unsure of what income to declare

While many people will only have income from their job, there are many types of income that you may need to declare on your tax return - but it will largely depend on your individual circumstances.

If you have several sources of income, you'll have to detail all of them, including what you've earned if you're employed, even if you've already paid tax on this income.

That's because HMRC needs to know the overall amount you've earned during the 2019-20 tax year in order to work out what rate of income tax you need to pay, which can also affect your tax allowances.

Other types of income you might have to declare include:

  • Rental income
  • Profits earned from selling valuable items
  • Savings or investment income of more than £10,000
  • Pension income
  • Self-employed income
  • Tips or commission
  • Taxable income from abroad.

The kind of income you receive will also have a bearing on what kind of tax you need to pay. Dividend tax is charged on income from shares, capital gains tax is payable when you sell a valuable asset for a profit, income tax and National Insurance are payable on most other kinds of income.

Self-assessment and child benefit

Many families have found themselves with unexpected tax penalties after failing to submit a self-assessment tax return after claiming child benefit.

That's because there's a 'high-income child benefit charge' if either partner earns £50,000 or more and must be paid by the higher earner - even if the person who earns above this threshold is not the person claiming child benefit.

The tax 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 when calculating your self-assessment income - 'cash basis' or 'traditional accounting'.

Cash basis is when you record money once it's actually paid in to or out of your account, and it's more suited to sole traders or small businesses as you won't have to pay tax on cash that you haven't received yet.

Traditional accounting is when you record money when it's invoiced, so even if the funds might not have moved 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

There are lots of different tax allowances on offer - they're available for different types of income and different types of personal circumstances. Many are applied to your income automatically, but some have to be applied for.

It's not quite as confusing as it sounds. These allowances will be applied automatically to any relevant income you've received:

These other allowances have to be applied for, and you must fulfil certain eligibility criteria.

  • Marriage allowanceFor spouses and civil partners where one person earns below the personal allowance and the other is a basic-rate taxpayer.
  • Married couple's allowanceFor spouses and civil partners where at least one of you was born before 6 April 1935.
  • Blind person's allowance For those who are blind or have severely impaired sight.

These all have the effect of allowing you to earn more money before your tax obligation kicks in, reducing your overall tax bill.

6. Not claiming expenses

Items or services you've had to pay for in order to do your job could be claimed as expenses on your tax return.

If you're employed, you could receive tax relief on what you've paid for - as long as your employer hasn't already reimbursed you.

This could be on things such as business travel, uniform expenses and professional membership fees - and you can also claim if you've been told to work from home. The tax relief can be added through your tax code if you're on Pay As You Earn (PAYE).

If you're self-employed, the cost of some expenses can be deducted from your annual profit, which will also reduce the amount of tax you owe. The kinds of claims you can make are similar, but you can also claim for money spent to run a business premises, and expenses from having employees.

For more on this, see our news story that details which expenses you could claim to cut your tax bill.

7. Failing to keep your records

Once you've successfully filed your return, that doesn't mean everything from 2019-20 can be binned - you need to keep hold of your records as evidence of what you've claimed on your tax return. This includes the receipts, invoices, bank statements and other documentation you used as a reference on your return.

HMRC has the right to investigate your tax liabilities, and having all of your paperwork to hand could save you from paying a penalty if it proves against HMRC's suspicions of wrongdoing.

There aren't any rules on how your records should be kept - figures can be recorded in a spreadsheet or using accounting software, or you can note down the figures by hand and keep them with the paperwork in a folder.

The records must be kept for at least five years from the 31 January following the relevant tax year (so, you're 2019-20 records should be kept until at least 31 January 2026). 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.

File your 2019-20 tax return with Which?

For a jargon-free, easy-to-use approach to filing this year's tax return, try the Which? tax calculator.

You can use it to tot up your tax bill, get tips on any allowances or expenses you might have missed and submit your return direct to HMRC.

The video below shows how the tool works:

This story was updated on 25 January 2021 with information about HMRC waiving fines for late filers in February.