Taxes can be confusing! And knowing whether you need to do self assessment or not can cause a lot of worry. Here, you’ll find out more about self assessment and who needs to register to do it.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. What is Self Assessment?
Self-assessment does not mean self-employed. Being self-employed means that you work for yourself. But self assessment is the term given to the process created by HMRC that allows anyone who receives untaxed income to declare it to the government and pay any tax due.
2. What is Untaxed Income?
If you’ve ever been employed by someone, you’ll know that on your payslip your employer deducts income tax and National Insurance on your behalf before you get paid. Your salary is taxed income.
There are other types of income that are paid to individuals without any tax deducted but count as taxable income. This is untaxed income and common examples are:
- Self-employment profits
- Bank interest
- Rental income
- State Pension
- Local authority payments to foster carers
- Cash in hand earnings
Self-employed individuals will most likely need to register for self-assessment. This is because everything they get paid has no tax deducted from it (unless they are a CIS contractor).
If you are receiving untaxed income, including from self-employment, then it’s your responsibility to tell HMRC about it. You need to work out how much tax you owe and pay it over. The way you do this is by registering for self-assessment and filling in a tax return once a year.
3. What is a Tax Return?
A tax return is a form issued by HMRC (also known as an SA100). It contains lots of different sections and boxes that you need to fill in to declare your untaxed income. Once completed, HMRC will then calculate how much tax you owe ready for you to pay them.
You need to fill in your tax return by the 31 January each year summarising all your earnings for the previous tax year. The tax year runs from 6 April to 5 April each year. So a tax return due by 31 January 2023 would contain income between 6 April 2021 to 5 April 2022.
4. What Counts as Tax Free Income?
Some income is paid without any deductions because they are tax-free and you may not need to tell HMRC about them. Here are some examples of tax free income:
- Your first £2,000 of dividend income (dividend allowance)
- Your first £1,000 of interest on savings
- Premium bonds or lottery winnings
- Income from a lodger under £7,500 (rent-a-room scheme)
- Children tax credits
- Maternity allowance
- Universal credit
- Winter fuel payments
- Disability Living Allowance