Tax return tips – make sure you don’t overpay

Charles Calkin, partner and financial planning consultant

It is the time of year when millions of Britons rush to meet HMRC’s 31 January deadline for online self-assessment tax returns. Last year a record 10.8m people submitted their annual tax return on time, with nearly 33,000 filing in the final hour. But another 840,000 people missed the deadline.

Those who are late are immediately fined £100, with an additional £10 being added every day the assessment is not returned for up to 90 days, creating a maximum fine of £1,000.

If you still have not filed the return six months after the deadline you will either be fined £300 or 5pc of the tax due – whichever is higher – on top of the existing penalties. You will be fined another £300 or 5pc after 12 months, and could even be fined 100pc of the tax due in very serious cases.

Even if you are not entirely happy with your self-assessment tax return on deadline day it is still worth filing as returns can be amended once they have been submitted without running the risk of incurring a fine.

The online self-assessment tax return allows the UK’s tax body to collect income tax and National Insurance contributions from people whose payments are not all deducted from their wage packet as part of the pay-as-you-earn (PAYE) system. Any other taxes due (for example, additional tax on interest, dividends and capital gains) can be assessed and collected in addition.

Without an accountant, completing a tax return can be a complicated process. Higher-rate taxpayers in particular may overpay if they fail to take advantage of a wide array of tax reliefs.

How can I reduce my tax bill?

There are a whole host of ways to mitigate your tax. A number of expenses can be subtracted from your total income, creating what is known as your ‘taxable income’.

Those who work from home or are self-employed may be able to claim expenses which are necessary to the running of their business against their income. This might include things like travel costs, office supplies, phone bills, insurance, energy bills and – in some cases – food.

Under HMRC’s ‘annual investment allowance’, people who run their own business may be able to spend up to £200,000 a year on plant and machinery and offset this against their tax bill.

Those who are employed may be able to claim back the cost of petrol for their car if their employer does not provide them a mileage allowance or the amount they are provided with falls short of HMRC’s approved mileage rates – so always keep a record of how much you have travelled in the course of doing your job.

Make a note too of all the donations you have made to charities in the year through gift aid. It is well known that gift aid allows charities to reclaim the basic rate of tax on every £1 you donate. (Though the basic rate of tax is 20%, the uplift for the charity is 25% because of the way the relief is calculated – HMRC says that for a basic-rate taxpayer to give £1, they would have had to earn £1.25 and 20% of £1.25 is 25p.) Less well known is that high earners can claim back the difference between the basic rate of tax and marginal rate of tax they actually paid – usually by reducing their income tax bill. It can make giving to charity even more rewarding.

A further concession which is worth noting is that taxpayers can donate to a charity now and have the tax relief applied to their return covering the last financial year. This is useful if you were a higher rate (40%), additional rate (45%) or, potentially, a 60% (where the personal allowance is clawed back, possibly to nil, by £1 for every £2 of taxable income over £100,000) taxpayer last year but will be a lower-rate taxpayer this financial year. If you have spare capital and want to reduce last year’s bill, you can donate right now and reap the rewards immediately.

Higher-rate and additional-rate taxpayers can also claim tax relief at their marginal rate on their pension contributions. However, as only the basic-rate tax relief of 20pc is added to pension contributions by providers at source, these taxpayers must remember to claim back the extra relief from HMRC in their tax return. It is estimated that high earners lose out on hundreds of millions of pounds of relief every year by forgetting to do this. If you have failed to do this in previous years, it is probably worth seeing an accountant and getting some help in calculating what is owed and claiming it.

Other forms of relief include mortgage interest tax relief, which allows buy-to-let landlords to offset mortgage interest against their income – although this is gradually being phased out – and the marriage allowance, which may allow you to transfer £1,150 of your tax-free personal allowance to a higher-earning spouse or civil partner.

An effective relief for some people is the Enterprise Investment Scheme (EIS). The scheme is aimed at wealthier, sophisticated investors, often with a greater appetite for risk, allowing them to invest up to £1m in qualifying small companies in any tax year and receive up to 30pc tax relief on this sum.

If you generate a loss from your EIS investment, this can be set against your income in the year of disposal or the previous tax year. Losses can also be carried forward to be offset against any future gains made from investments.

A similar scheme called the Seed Enterprise Investment Scheme allows people to invest up to £100,000 a year in early-stage companies and receive initial tax relief of 50pc on their investments.

Other so-called venture capital schemes include Social Investment Tax Relief, which allows investors to claim 30pc tax relief on up to £1m invested in certain socially focused organisations, and, finally, 30pc tax relief on up to £200,000 invested in Venture Capital Trusts, which raise money to invest in early-growth companies.

We tend to be wary of these schemes because of the risks involved. It is important to take advice and we would always warn investors not to let the tax tail wag the investment dog. If you can’t see a strong investment case for these schemes without the tax benefits, then you should probably avoid them. You should certainly make sure you fully understand the costs and risks.

A comprehensive list of all existing tax reliefs can be found here.

Do I need to fill in a tax return?

The return covers the last tax year, which ran from 6 April 2016 to 5 April 2017. You must fill one in if, during this period, you were self-employed, enjoyed £2,500 or more in untaxed income (from renting out a property, for example), received an income from savings or investments or dividends from shares of £10,000 or more, or accrued a capital gains tax liability (from selling shares, a second home etc.).

Others who must fill in a return include company directors, those with an income of over £50,000 (or whose partner earned that much) who claimed child benefits, those with overseas income which they needed to pay tax on, those who lived abroad and had a UK income, those with a taxable income of more than £100,000, and trustees of a trust or registered pension scheme.

Finally, you must also pay if you have been told by HMRC that you did not pay enough tax last year, or your state pension was more than the personal allowance for the last financial year of £11,000 and was your only source of income.

What do I need to do?

The end-of-January online deadline applies to 85pc of eligible taxpayers who have opted to move to HMRC’s online system. If you still send your return by post, the deadline has passed – it was 31 October 2017. Unfortunately, the deadline for registering for this year’s online self-assessment passed on 5 October 2017. To sign up for the service going forward you must first register at www.direct.gov.uk.

You will need to provide several pieces of identification like your passport, bank details and National Insurance number. Once registered, you will get a letter with your 10-digit unique taxpayer reference and will also be enrolled for the self-assessment online service. Once you have completed your self-assessment tax return the system will calculate any additional tax due.

Predictably, paying your tax due to HMRC is a rather complicated process. Throughout the tax year you will make two ‘payments on account’ – each equal to half of your tax bill for the previous year – towards your final bill for the current year.

If these two payments fall short of your total bill for the tax year, then you will have to pay what is known as a ‘balancing payment’, which covers the shortfall, by 31 January the next year.  On 31 January, you will also have to pay your first payment on account towards next year’s bill.

Here is a handy example to better explain this conundrum, as provided by HMRC:

Your bill for the 2016/17 tax year is £3,000. You made two payments on account last year of £900 each (£1,800 in total).

The total tax to pay by midnight on 31 January 2018 is £2,700. This includes your balancing payment of £1,200 for the 2016/17 tax year and the first payment on account of £1,500 (half your 2016/17 tax bill) towards your 2017/8 tax bill.

You have to pay your second payment on account of £1,500 by midnight on 31 July 2018. If your tax bill for the 2017/18 tax year is more than £3,000 (the total of your two payments on account), you’ll need to make a balancing payment by 31 January 2019.

What will I need?

Before you start filling out the return it is worth getting together all of your documents to ensure you are clear what your total income, gains and deductions are.

In this case, income includes interest on UK bank accounts, untaxed foreign interest of up to £2,000, dividends over £5,000, foreign dividends up to £300, state pension and other pension income, capital gains over £11,100, and income from buy-to-let properties.

A useful list of income sources which may need to be included can be found here.

Conclusion

Filling out a tax return remains difficult, meaning many are still likely to miss valuable tax reliefs – particularly if they do not file until the very last minute. It is worth considering hiring an accountant. With their expertise allowing them to ensure you are claiming back the maximum allowed relief, you may well find they more than pay for themselves, while also reducing stress on your behalf. This also provides continuity for a surviving partner.

As part of the ongoing financial planning process we always take into consideration a client’s tax position and look for opportunities to reduce the annual tax bill legitimately – hopefully much earlier than a couple of weeks before the tax deadline!

It is often worth taking advice. All tax treatment depends on your personal circumstances and a professional adviser should be able to keep you up to date with legislative changes too – and there are always plenty of those!

Charles Calkin

Posted 16th January 2018

You should not act on this content without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made of given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions

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