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Self-assessment tax return mistakes that cost you money

The prospect of the annual self-assessment tax return is a daunting one to many business owners and freelancers, and this means that the temptation to put it off until the very last minute can be overwhelming.

That’s a bad idea though, because filling it out under pressure increases the likelihood that you will make mistakes, which can end up costing you more money in the long run. These are some of the self-assessment errors that can be costly.

Leaving out income

While it may seem like common sense that your self-assessment must include all of your taxable income for the year, it is not unusual for people to fail to include relevant income when totalling up the amount – possibly due to confusion over what actually counts as ‘taxable’ income.

As well as the profits from your company for the year, income liable for tax can include payments into a personal pension, bank account interest and rent received from either residential or commercial properties you own. Failure to include these when filling out your return can see you hit with a fine by HMRC.

Payments on account

Payments on account are when HMRC requests advance payment of some of the tax bill for the following year, in addition to the current one. You are charged these additional tax demands at the end of January or July and they can potentially make your tax bill for January twice as much as you had expected. Not being prepared for the possibility of these extra payments can be crippling for your personal and business finances, so it is wise to be aware of them and if they are likely to be applicable.

Tax code errors

It is vitally important that you enter the correct tax code when you are filling out your self-assessment form, because it is this code that is used to determine precisely how much tax you owe. You will find your tax code on any payslips you have, and you should be very careful to get it right, because a mistake could lead to you being asked to pay more than is due.

Alternatively, you could be given a tax bill that is too low, only to find yourself hit with a sudden demand for the rest of the money once HMRC realises the error that has been made. Obviously, this can be a real problem if you are not in a position to be able to pay it when that time comes.

Failing to include all expenses

Not all of the mistakes people make when filling out their self-assessment returns are costly because they lead to fines; sometimes people simply fail to take advantage of ways to reduce their tax bill. If you are paying genuine costs related to the running of your company from your own money, then that is a legitimate business expense and should be detailed in the expenses section of the return.

Any of the everyday running costs for the business should be included in this section, however small they are, because it will reduce the profits and thus reduce the tax owed on them.

There can also potentially be expenses accrued in the running of your company that you do not pay out for at the time, but which can still be eligible for tax relief. One example of this would be the costs incurred as a result of making journeys using your own personal vehicle, but for business reasons. Anything that can reduce your tax bill is worth including in your self-assessment, so check to see if this applies to you.

Failing to include donations to charity

Another mistake people commonly make is to not include money that has been donated to a charity. The most probable reason for this is that they do not realise that it has the potential to cut their tax bill for the year. To claim for this relief, you will need to be a 40% higher rate taxpayer and use Gift Aid when donating.

This scheme allows charities to claim the 20% basic rate tax relief back from HMRC for every donation you make – for example, if you donate £1,000 the charity can claim an extra £200 in tax relief, taking the total money they receive up to £1,200. Gift Aid also allows you to claim for the difference between the basic tax rate and the higher one – which is 20% – meaning you can claim back £200 for your donation. It benefits both the charity and the donor.

Waiting too long before registering for self-assessment

Before you can fill out a self-assessment tax return, you have to contact HMRC and let them know that you need to do so. When you do this, they will send you a letter that contains your Unique Taxpayer Reference (UTR), without which you cannot set up an account online to complete the form.

The mistake that people often make is to leave it too late to contact HMRC, because it can take several weeks to receive the UTR and create your account. Thus, if you wait too long to begin the process, you may not have the account set up before the deadline for completing self-assessment and paying your tax bill arrives.

HMRC will not accept late registration as a valid reason for not filling out the form and paying your tax by the 31st January deadline, and the result will be an immediate fine of £100. This is a very easy mistake to avoid, and a costly one to make, so be sure to get the registration process underway as soon as possible.

There are a number of mistakes that can be made when completing self-assessment that can end up costing you money. Most of these are not hard to avoid, as long as you are sure about what you are doing – or get advice from HMRC or an accountant if you are not. Paying tax is bad enough without additional self-inflicted costs.

Posted by Louise
May 3, 2019

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