How to be more organised with filing future tax returns
The tax return deadline is here again, and if you’re one of the 758,707 people who filed their return on the final deadline of 31 January last year you’ll likely be currently rushing to finish yours. And if the last minute rush means you want to be more organised in the future, here’s how.
Around one in six people think that they paid more tax than they really owed last year, according to research from Which?, because they made an error on the form or failed to claim for allowable expenses.
What can I claim as expenses?
– Office costs, such as rent, stationery, phone bills, and printing
– Travel costs, such as, parking, car insurance, train fares, breakdown cover and meals on business trips
– Clothing costs, like uniforms or protective clothing
– Staff costs, such as salaries, bonuses or subcontractor fees
– Things you buy to sell on, so stock or raw materials
– Financial costs, for example insurance or bank charges
– Costs of your office, for example heating, insurance, lighting, business rates
– Advertising or marketing, so website costs, free samples and newspaper advertising
Many self-employed people are aware of the fact they can claim for office costs, travel expenses and staffing costs, to offset against revenue and reduce taxable profit, but many allowances go unused. See the accompanying box for the expenses for which you can claim.
Self-employed people who work from home, for example, can claim some of their costs for heating, electricity, mortgage interest or rent, internet bills and council tax.
You just need to work out proportionally how much you can offset. If you have six rooms in your house and you use one as a home office, you can claim a sixth of the above bills as expenses.
You can then pro-rata this based on the number of days you work from home. For example, if your electricity bill is £600 a year, you can claim 1/6th of this, so £100 as expenses. If you then work five days a week from home, you can claim 5/7th of this, being £71.43.
Alternatively, if this is too much of an admin effort you can use simplified expenses to claim for costs such as working from home or vehicle costs. You can use HMRC’s handy checker here to see which route is better.
The key to claiming expenses effectively is keeping all the right paperwork, so you have proof of bills, expenses and other costs that are tax deductible. There are now a plethora of online services and apps you can use to help keep track of these, or you can use an old fashioned shoe box, as long as you keep stuff organised.
SET ASIDE MORE CASH
You’ll hopefully earn more money each year in the future, so you should make sure you increase the amount you put away for your tax bill to make sure you’re not caught short each January.
You can use this government-run tool to help estimate what your tax bill will be next year, to help you save the right amount.
But if you err on the side of caution and save more, then you’ll avoid a shortfall, and potentially end up with a pot of extra cash so you can treat yourself next January, or top up your investment account. If possible, round up the amount you put aside each month or week.
HOW TO CUT YOUR TAX BILL NEXT YEAR
Make sure that you make the most use of any tax relief schemes to help reduce your bill. Any higher-rate taxpayers paying into a personal pension, such as a self-invested personal pension, should make sure they claim the additional tax relief due to them, which will help to offset any tax bill due.
You should also make sure you claim for any charitable donations you’ve made in the year. A full guide is here, but essentially as a higher-rate tax payer you can claim 20% relief on any donations.
What happens if I miss the deadline?
Put simply, you’ll be fined. Initially you’ll pay a £100 fine, even if you aren’t due to pay any tax. You’ll then be charged £10 a day after three months, up to £900.
After six months another 5% of the tax due or £300 is added on, whichever is the bigger number, and then after a year another 5% or £300 will be charged.
All that is just for filing; if you fail to pay the tax due by the deadline you’ll also face fines of 5% of the tax due after 30 days, six months and 12 months.
Anyone investing their cash should make sure they use an ISA, to shelter their investment income from tax and any gains from capital gains tax. But once this annual limit of £20,000 has been exhausted there are other tax-efficient options available such as venture capital trusts (VCTs) and enterprise investment schemes (EIS), although these aren’t suitable for everyone and come with strict rules which you need to understand before investing any money.