Now we are well into the new tax year, people will now be preparing their Self-Assessment tax returns. If you are preparing your own, this is a must read; we outline 5 common mistakes people make on their tax returns, so you can avoid making these yourself and ensure that the correct amount of tax ends up getting paid to HM Revenue & Customs (HMRC):
1) Not declaring all the income you received in the tax year
It is important to include all the income you earn during the tax year, be it employment, self-employment, savings, dividends, rental properties, life assurance gains, overseas income and much more.
It isn’t uncommon for people to miss off supplementary pieces of income such as dividends, but it is important for everything to be included as HMRC should quite easily be able to spot any anomalies.
That said there are some types of income which are exempt and do not need to be declared, such as income within an ISA or dividends from Venture Capital Trusts, provided the contribution/investment limits are adhered to.
2) Not claiming eligible pension reliefs
We commonly see mistakes being made by individuals (and other accountants when we take on new clients) when it comes to pension contributions, which can potentially be a complex area when it comes to maximising your tax relief.
You can make contributions either through your employment (most people do under auto-enrolment) or through private pension contributions.
In respect of making contributions through your employment, if you are making contributions under a ‘net pay scheme’ then you will have received your tax relief up front. If you are making contributions under a ‘relief at source’ arrangement, you obtain basic rate (20%) tax relief up front, but if you are a higher or additional rate taxpayer, you can claim additional relief through your tax return.
Generally if you are making contributions to a personal pension scheme, you again obtain basic rate tax relief up front, and can claim higher or additional rate tax relief through your tax return.
3) Not including expenses that can be claimed
If you are self-employed, your business will have various running costs. You can deduct some of these costs to work out your taxable profit as long as they’re allowable expenses. Typical expenses include office costs, travel costs, staff, advertising, financial costs and many more.
The same goes for claiming expenses in relation to a property you rent out. Common types of rental expenses include general maintenance and repairs, insurance, letting agents fee, costs of services and many more.
4) Including expenses that cannot be claimed
In order for expenses to be deductible from either self-employed income or rental income, the expenses must be ‘wholly and exclusively’ for the purposes of the trade or rental of the property. These must be proven as such in the event of HMRC raising an enquiry.
Areas where HMRC is most likely to scrutinise include legal and professional expenses, repairs and renewals, entertaining and stock.
In the event of an expense relating to something used partly for business and partly for personal use, the allowable expense included in your return must be apportioned, for example if a compute was used 50% for business purposes and 50% for personal use, half of the computer costs are allowable.
In addition, the expenses must also be revenue, rather than capital expenses. This essentially means that there is not an ‘enduring benefit’ to that expense. An example of capital expenditure is purchasing a new car, van, or equipment. In the case of capital expenditure, there are separate rules on claiming the cost of these against your profits. These are known as the capital allowances rules.
5) Not being aware of payments on account
As well as the tax that is due for the return you are submitting, HMRC may request making tax payments in advance of next year’s tax bill (depending on your circumstances) – this is known as a payment on account.
50% of the payment in advance is due by 31 January along with this year’s payment, and the other 50% is due by 31 July.
If your balancing tax liability is under £1,000, payments on account will not apply.
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