To understand how do tax returns work in the United Kingdom, you should have a good understanding of the self-assessment (SA) method. Most UK taxpayers settle their taxes through the tax deducted at the source of their earnings and savings. It minimises the need to make further declarations later on. However, taxpayers must complete the tax return processes annually as issued by the HMRC (His Majesty’s Revenue & Customs).

In this blog, we will discuss in detail how do tax returns work in the United Kingdom and the associated rules, regulations, timelines, fines and likewise.

What is the Self Assessment (SA) of Taxes?

The self-assessment method explains how do tax returns work in the UK for those whose tax is not deducted at the source.  Any income not taxed at the very source is liable to pay taxes. The ‘pay-as-you-earn’ taxpayers are not obligated to file returns. If you are self-employed, someone who owns a business or is partnered up with a business, a trustee or an estate executor, or a minister of a religion or denomination. In that case, you are bound to complete the self-assessment. You are liable to pay taxes as you are not excluded from the source. You happen to be the source of income. Thus, you must complete the UK tax returns work process within the specified deadlines.

Who Should Do a Self-Assessment?

The majority of the taxpayers in the UK pay all of their taxes at the source and that is how tax returns work in the UK. It means that the employer or the payer deducts the taxes before they make the payment. These taxpayers do not need to file returns as it is deducted from the source.

You should do a self-assessment in case any of the following applies to you:

  • You are self-employed
  • You are a partner in a business
  • You are an executor of any kind of estate
  • You are a trustee of a denomination or religion

In addition to the above, you must complete the self-assessment if you have made some profits by selling shares, land, or any other assets. The HMRC will require you to submit proofs along with the tax returns.

What Records Should You Maintain for Self-Assessment?

One of the most important aspects of understanding how do self assessment tax returns work in the UK is being aware of the documents or records that you need to submit. Those opting for self-assessment must maintain records, as records act as proofs. When the authorities of the HMRC validate your tax returns, these records will become a mandate. The records can be maintained digitally or on paper. The HMRC can charge you fines and penalties in case of incomplete and inaccurate records.

In understanding how tax returns work, documentation is one obvious aspect. Maintaining and handling data must be done with care. You must segregate your personal and business records while documenting them. Based on the size and nature of a venture, there are a few guidelines that you can follow to maintain your records for self-assessments -

  • All sales and other income must be recorded with proof, like invoices, bank statements, and pay slips.
  • All purchases and other business-related expenses must be documented with all the bills, receipts, and relevant documents.
  • Sales assets and purchases like capital equipment for the business must be recorded.
  • All amounts withdrawn from the business account, stock, cash, etc., even for personal use, must be documented with the relevant documents.
  • All the amounts paid and invested for the business, even personal contributions, must be maintained.
  • All mileage claims for business trips must be recorded with the trip's journey date, times, and distances.

Note that those who are self-employed are to maintain and hold their business records and relevant documents for at least five years from the 31st of January submission deadline.

If you are not self-employed yet required to do a self-assessment, you must maintain these documents and hold on to them for at least 22 months after the tax year. In cases where the tax returns are filed past the deadline, you must ensure that you hold your records for at least 15 months after submitting your tax returns.

Payment of Taxes and Penalties

Understanding the UK tax return work process essentially requires an understanding of the fines and penalties that might accrue to you under different circumstances. The HMRC can levy a penalty for the following reasons:

  • Delay in payment of taxes
  • Delay in submission of paperwork and tax returns
  • Failure to tell the HMRC about variations that impact your tax liability
  • Errors while filing returns, payments, and other paperwork

Understanding the role and due process followed by the HMRC is a necessity to understand how do tax returns work under the King’s rule. When the HMRC levies a penalty, a proper Penalty Explanation Letter is sent to the paye. It outlines the period over which the penalty is levied and the cause and type of the penalty. When you know of a specific mistake you made on your tax returns, immediately contact the HMRC. It will reduce the penalty charges. When a notification is sent to HMRC before inquiry and notice to inspect your records, your penalty charges will be substantially minimised. When an inquiry has begun, you should cooperate to minimise the charges levied.

Penalty Payment for Delays

The penalties levied due to delays in the tax return process are as follows:

  • Following 30 days of delay in payment, a 5% tax outstanding is levied.
  • When you are six months late, another 5% of the tax outstanding is levied.
  • When you are over 12 months late, another 5% of the tax outstanding is imposed.

Interest Payment Delays

The HMRC charges interest to compensate for the delays in tax payments. Interest is charged for the entire duration from the payment's due date until the actual payment date.

When the interest has occurred due to a specific mistake made by the HMRC, you must notify them to correct the calculations. Keeping the documentation of how your tax payments are made can help you when such situations arise.

Penalties Levied Due to Errors

When mistakes are made on the tax returns forms that are submitted to HMRC, it creates a discrepancy in your tax liability. Hence, you can be charged with a penalty. Such a penalty is termed an ‘inaccuracy penalty.’ The penalty amount can be influenced by:

  • The HMRC’s assessment of the type of behaviour involved
  • The proportion of the lost revenue
  • Whether or not the HMRC is notified about the error

In cases with reasonable excuses, the HMRC does not charge you a penalty.

Assessing Time Limits for Self-Assessment

Here is a timeline that you should know if you want to have all the necessary information about how tax returns work -

  • January 31st, during the tax year: When payments are to be made on an account, the first payment for that year ending is due on the 5th of April.
  • April, after the completion of the tax year: The tax is completed on the 5th of April of every year. Succeeding this date, those liable to file a return will receive a notice for filing. In cases where you do not receive a notice, you will still be mandated to file for returns.
  • July 31st, succeeding the end of the tax year: Those who are liable to make the second payment on an account must do the necessary processes.
  • October 5th, succeeding the completion of the tax year: When you have missed out on filing for taxes for the previous year, you must submit a return. You will have to notify the HMRC before this date.
  • October 31st, succeeding the end of the tax year: If you send the HMRC a paper tax return, it must be submitted by this time. Post the passing of the date, and you will be levied with a penalty even if you are not liable to pay taxes.
  • December 30th, succeeding the end of the tax year: Online tax submissions lower than 3000 pounds must be done before this date. Your taxes will be collected through the tax code.
  • January 31st, succeeding the end of the tax year: All tax returns filed online must be done on or before this date.
  • January 31st, succeeding the end of the tax year plus one year: If there is an error in your returns filing, you will have an amendment period of 12 months after January 31st of that tax year.

Unicorn Accountants Can Help

The norms and regulations surrounding tax return filing can be both confusing and overwhelming. Keeping an accurate track of all your payments, earnings, and investments can require accounting expertise. Having a detailed knowledge of how do tax returns work will need a lot of time. Instead, you can partner with us and rest assured that all your tax compliances will be met seamlessly.