Here we are at session number 44, we’re approaching the tax deadline and today we’re going to be talking about how to prepare for your tax return. As ever, I’ll be sharing what you need to know and what you need to do to get ready for this important day in the financial calendar.
Doing your tax return probably holds about as much excitement for you as paying your gas bill. More than that though, maybe it fills you with dread each year, and you put it off until the last minute, which is about now. This session is being released on the 22nd January, which means you have just nine more days until the deadline for filing your tax return and importantly, paying any tax due.
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After the main body I’m going to look at the most recent reviews that have been left by listeners – some fantastic ones this week – and announce the next session topic. I’ll also give you a quick definition of a mysterious financial term in the Glossary
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But first…
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Introduction
Like most things, putting off your tax return won’t get it done, and once you know what you are doing, you’ll realise that in fact, it’s not that big a deal for the vast majority of people. It’s all about knowing what information you need and how to get that information on to the form.
It’s worth mentioning that, as you know by now, I do advocate getting an expert to help you if your tax return is anything other than quite straightforward. 95% of people have affairs simple enough that they can do their own tax return, but even then, most of those will never have to. Generally, you only complete a tax return if the Revenue asks you to. But here’s a quick checklist to see if you need to complete one or not. You must complete a tax return if:
- You’re self employed
- You’re a company director
- You’re a minister of religion
- You’re a member of Lloyd’s or are a Lloyd’s ‘Name’
- Your annual income is £100,000 or more
- You have Capital Gains Tax to pay
- You have income from savings, investment or property which combined with your other income are more than your combined allowances and reliefs, or if any of that income is from foreign sources
That last one we’ll need to explain a bit more later on, but if you fall into any of those categories, you should probably be doing a tax return
Today I’m hoping that at the end of this session you’ll approach your tax return, if not with anticipation, at least with calm resignation as you know what needs to be done and how to do it. So if you’re ready pull your head out of the sand and take the green and white piece of paper in hand – let’s crack on.
Everything you need to KNOW
As usual we’ll cover what you need to know first, so that you’re armed with the right info before you put pen to paper, or hand to mouse.
1 – Income comes in different forms
Her Majesty’s Revenue & Customs, henceforth to be known as HMRC or just plain old The Revenue, want to know how much money you have made in the tax year so that they can charge you the right amount of tax. Money can come to you in many different forms, which are dealt with slightly differently so let’s look at those first:
Earned Income
This is the income you received from your job or self-employment. If you are employed by someone else, or are an employee of your own company, you will be on the payroll and get a salary each month. This is always taxed ‘at source’ which means tax is already taken off by the time you get it.
If you are self-employed, this will be your profit, or your income less your expenses.
If you are receiving a pension in any form, this is deemed to be earned income too, including the state pension.
Earned income is taxed first, before any of the other sources.
Savings Income
Specifically this is interest received on money in the bank, or income from investments funds which is deemed to be interest. Some fixed interest funds are taxed this way. You can ignore interest from your Cash ISA, if you’re getting any 😉
Investment Income
By this, the Revenue means dividends received from shares which you hold, or units/shares in investments funds like OEICs or Investment trusts. You can ignore income from your Stocks & Shares ISA.
Property/Rental Income
This is rent received from tenants in a property you own, less any costs you have incurred in managing that property
State Benefits
Some, but not all benefits are taxable. Examples of taxable benefits are Carer’s Allowance, Jobseekers Allowance, Employment and Support Allowance and incapacity Benefit.
Money received from the surrender of investment bonds and life insurance policies
Income derived in this way usually arises from a chargeable event on such investments and policies. If you have withdrawn money from the investment or policy throughout the year and it needs to be reported.
Capital Gains
This isn’t income per se, but is still money you have brought in during the tax year and which is taxed in that year. If you have made a gain of more that £10,900 (current tax year amount) then you’ll need to declare that.
I wonder if that list is longer than you thought it would be? There’s a more detailed list on the HMRC website.
This should tell you that it’s important to keep good records! I’ll go over the documents you will need in the second half of the show but for now, this is the stuff the Revenue wants to know about so you need to be prepared to provide the necessary information.
2 – Know your dates
The tax year runs like clockwork and deadlines are deadlines. If you miss them you will be fined automatically, and you could also be liable for interest on any overdue payments of tax. Here are the main dates you need to know:
5th April – The last day of the tax year. The tax year runs, bizarrely from the 6th April to the 5th April. So the current tax year began on 6th April 2013 and ends on 5th April 2014.
30th September – The last day for filing a paper tax return. This is called Form SA100 (SA is for Self-Assessment). If you have asked for one, they will send you one each year or you can download one from the HMRC website. If they tell you that you are eligible to do so, you can complete a short tax return (Form SA200) which is a kind of condensed version, only four pages long last time I looked.
31st January – The last day for filing your tax return online and perhaps even more importantly, this is the last day for paying any tax due. If you have a late-ish amount of tax due to be paid on this date, the Revenue will also ask you to pay some tax on account for next year. Usually this is half the amount of tax you paid in the last year. Any tax you paid at source, for example through your payslip at work, will not be included in this payment on account.
31st July – This is the day a balancing payment must be made. Where you paid half the tax on account for the coming year on 31st January, the other half is payable on the 31st July.
Let’s get these dates absolutely straight in the context of the deadline coming up in a few days. The last tax year ended on the 5th April 2013. We call that the 12/13 tax year. This coming January 31st is the deadline for completing your 12/13 tax return.
If you have tax to pay for that year, it is due on 31st January. If HMRC deem that you must make a payment on account, you will pay half of it on 31st January and the other half on 31st July. These payments on account are for the 13/14 tax year, the one we’re still in.
Got that? Good.
Actually, that’s about it. A tax return is simply a report of your income and capital gains for the year. The calculations for working out your tax are pretty simple too as it happens, but that’s outside the scope of this session. But the online system and the various software tools which do your tax return for you will show you how the calculation works.
I covered a little more detail about how tax works in session 19. Maybe I’ll cover just Income tax in more detail in due course – we’ll see.
Let’s turn our mind now to what you need to DO to actually get the dratted thing done
Everything you need to DO
I have four steps you need to take to complete your tax return. So take a deep breath…let’s go
1 – Register for Self Assessment Online
If you’re listening to this, you must have at least some access to the internet, unless someone is selling pirate CDs of my podcast down the market in Bradford. Unlikely. Assuming then that you are online, it’s essential that you register for the Self Assessment online service.
This involves setting up an account with the Government Gateway which acts as a kind of central hub for accessing all sorts of government online departments. This takes a few days as they usually send you a registration number through the post. Once you have that, you can add the self assessment function to your Government Gateway account. If you haven’t done this yet, you’re going to need to get on with it now – you’re already pushing it to be registered before the deadline, let alone submit the return online. If the Revenue get shirty about it, you can just blame me for not releasing this podcast a could of weeks earlier.
You’ll just need your National Insurance number, your contact details and if you have completed a paper tax return before, your ten digit Unique Taxpayer Reference, or UTR.
While you’re waiting for your registration to complete, you need to start getting your paperwork together…
2 – Collate your paperwork
Filling in your tax return is basically all about adding the information you already have into the right boxes on the form. This means you need to know where to look for the information required by the form, so let’s look at each of the sources of income we talked about earlier and which pieces of paper to dig out.
Earned Income
If you are an employee who gets a payslip every month, you will also receive a form P60 at the end of every year. This form tells you the gross amount of money you have been paid, and the amount that has been taken off in income tax. It is these two figures that you need. They’re usually found towards the bottom of the form.
If you changed jobs in the tax year, you may have an entry for tax paid in the previous job too.
If you finished one job in the tax year, but didn’t start a new one, you will have received a form P45 which will also have the same information on it.
If you received a pension you would also be given a P60, just as if you were still earning a salary. If you have more than one pension income source, you will have multiple P60s and will have to collate the figures.
Savings Income
At the end of the tax year your bank or building society will provide you with a tax certificate, doing how much you have been paid in interest, and how much income tax has been taken off ‘at source’. Again, these are the only two figures you need.
Be careful though, as the certificate may just look like an ordinary bank statement and can easily be missed. Usually it arrives with the first statement after the end of the tax year, but may come separately.
If you have more than one bank account, you will need to collate all the tax certificates (sometimes just called a statement of interest or something similar) together and add up the figures, so you have total interest paid and the total tax deducted.
If you have a joint account with your partner, you would normally divdd the interest paid and the tax deducted equally between you.
Investment Income
When you hold shares, or an investment which itself holds shares, you would normally get a tax voucher either with each dividend that is paid out to you, or one consolidated tax voucher at the end of the year.
Dividends are paid out to investors with a 10% tax credit. Nothing is deducted as such, they are just deemed to have had 10% tax already paid on them.
So if you receive a dividend of £90, the Revenue deems that you have already paid £10 of tax on it, and that the gross dividend is actually £100.
Your tax voucher will usually show the gross dividend, the tax credit and then the net amount payable to you. It is these figures that you need.
Note that if you hold an investment and the dividends are reinvested instead of being paid out to your bank account, that doesn’t matter. It is still deemed to be income and needs to be added to your tax return.
Property/Rental Income
Hopefully you have kept good records here because no-one is going to provide a nice summary for you. Unless maybe you use a management company to manage your rentals, in which case you may have a summary of the rent received during the year.
Remember that you only pay tax on the net rental income after all your costs have been taken off. This is your profit from the rental. You can deduct from the rent received a whole list of things:
-
-
- water rates, council tax, gas and electricity
- maintenance and repairs to the property (but not improvements)
- contents insurance
- interest on a mortgage to buy the property
- costs of services, including the wages of gardeners and cleaners
- letting agents fees
- legal fees for lets of a year or less, or for renewing a lease of less than 50 years
- accountant’s fees
- rents, ground rents and service charges
- direct costs such as phone calls, stationery and advertising for new tenants
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Thanks to Which? Money for that list. Again, make sure you keep good records as you go along. There’s nothing worse than having to find all this information and do the calculations when you’re up against a tax return deadline.
State Benefits
If you are in receipt of taxable state benefits like the ones mentioned earlier, you will receive confirmation of how much you have been paid in the year. I believe that these benefits are paid net of income tax, but I’m not 100% sure on this. If in doubt, talk to your local Job Centre Plus or benefits office.
Gains from investment bonds and life insurance policies
If you surrender an investment bond or an insurance policy like an endowment, in certain circumstances this will give rise to something called a chargeable event. If it does you will receive a chargeable event certificate which contains the information you need for the tax return.
Life Insurance companies themselves pay tax so when the money comes out to you, you get a credit for this. This mens that if you are a basic rate tax payers, you may not have any further tax to pay. As you can imagine though it isn’t quite a simple as that. If the gain from the policy takes you into the higher rate tax band, then you’ll have to pay some extra tax. Or if you are over 65 and in receipt of the extra tax free band called the Age Allowance, this can be affected too.
The chargeable event certificate will show the gain and the tax deemed to have been paid and it is these figures you need for the tax return
Capital Gains
If you have sold an asset which has made you some money, you may need to pay tax on it. Again, you’re going to need to have kept your own records here.
The gain is simply the sale price less the amount you paid for the asset. But in addition to this simple calculation, you can take off the gain any expenses incurred in making the gain. So for example you may have sold a rental property and had to pay a solicitor to do the conveyancing for you. You would be allowed to deduct the legal fees off the gain.
Also, everyone gets an annual Capital Gains Tax allowance which in the 2012/13 tax year was £10,600 (it is £10,900 now). If the total gain across all the assets you sold in the tax year was less than this figure, you don’t have to report the gains to the Revenue at all.
Remember that any gains made on Stocks & Shares ISAs are exempt from Capital Gains Tax too.
There is more about Capital Gains Tax back in Session 19.
So you should now have all the information you need to fill in the boxes on the tax return form, so let’s look now at how to do that.
3 – Choose your tool
Once you have registered for Self Assessment Online, you have access to the very powerful system for completing the tax return on the HMRC website. This will walk you through, step by step, each page of the return. Each page deals with a certain type of income and is logical, for the most part.
You may find it helpful to print off the SA100 form and fill it in before you begin submitting your return online. It can give you an idea of what goes where and how far through the process you are. The benefit of the online form of course is that it won’t show you any boxes which are not relevant. Instead it hides those and only asks you the right questions, hopefully minimising the chance of you putting something in the wrong box.
The other benefit of the online system is that you get a calculation at the end to show you if you owe any tax or if HMRC owe you money. This saves doing it yourself as you used to have to do.
I have used the online system for clients and friends before, but for my personal tax return I use a separate piece of software called TaxCalc. You could argue that this is unnecessary as the HMRC online system is so capable, but it is partly a historical thing. Each year it loads up all the information from the previous year and asks me what has changed, which makes life easier for me. It also allows me to do up to six tax returns each year, which helps me keep client returns in one place (I don’t do many).
I think that the separate software just edges it for me in terms of ease of use, but the HMRC online system is improving all the time. If you are getting started for the first time you may want to avoid the cost (about £26) of separate software and just use the HMRC website.
4 – If in doubt, use an accountant
As I said int he intro, most people either do not need to complete a tax return – remember that list of people who do – or have affairs simple enough that they can complete their return themselves. Remember, it is literally just a cad of having the figures to hand, and then filling them in on an online form. It’s really not rocket science, and once you have done it once, you will wonder why on earth you were so reluctant.
But if in doubt, and if your affairs warrant some attention from an expert, you should definitely get in touch will your friendly local accountant. A good accountant can justify his or her fees many times over by virtue of the amount of tax they can save you, or even just the time.
If you have the information to hand, you can complete your tax return in less than 15 minutes, but say half an hour to an hour if it is your first time. You may pay an accountant £300-400 to complete your tax return, so you need to decide if it is worth paying to save you the hassle and time it takes to submit. For many people, they just don’t need to pay this, but for those who do, it is money well spent.
Summary
Hopefully I’ve impressed on you that you don’t need to be daunted by the idea of completing your tax return. It just takes a bit of preparation and some good record keeping.
I found the HMRC website to be very clearly written and helpful, so if in any doubt, check out their help pages. The online submission system offers lots of help as you go along too.
Good luck!
This week’s reviews
Huge thanks to Jamsam474227, AlexOsprey, Sniggering Mongoose, MajorWagonWheel and Nelly2434 for their really kind reviews this week. Very humbling and great to read – I appreciate you so much!
If you like what you hear on this podcast, please leave a rating or review on iTunes by going to meaningfulmoney.tv/iTunes just like those guys did this last week. This helps others to hear about the show and to subscribe, because it keeps me near the top of the rankings.
Glossary
Accumulation Units and Income Units
If you hold an investment fund like an OEIC or unit trust, you will often have the option of buying either accumulation units or income units. The difference between the two types is all about what happens when the underlying investments produce a dividend.
If you hold income units, the dividend will usually be paid out. There isn’t a lot of point holding accumulation units if you want to receive the income from the investment.
When accumulation units pay a dividend, the value of each unit goes up by the amount of the dividend. So you don’t ever receive more units, the units you already have increase in value by the amount of the dividend.
If you roll up the dividend produced by income units however, the dividend buys more units so your total holding will increase.
As they say in my part of the world, it’s the same spud only mashed. In other words, it makes no difference to your tax – income is income, no matter whether it is paid out to you or not.
The always-excellent Monevator has a great article on accumulations and income units here
News
More good news on the fat-busting front. Who knew that exercise would make such a difference?! I lost another six and half pounds last week and now tip the scales at 17st 6.5lbs. That’s a total loss of 10.5lbs so far – with another 48.5lbs to go.
In other news Hargreaves Lansdown reduced their fees quite significantly on their self-advised platform. I covered HL and some other similar platforms back in session 37. The consensus from those who study these things is that this new charging structure is competitive but with a sting in the tail if you want to transfer money away from HL onto another platform.
There’s a good summary of the changes and how they stack up against their competitors from the Telegraph here
Next Session Announcement
Next time we'll be talking about the process of getting probate. If you are acting as an executor for someone who has died or if you have been asked to and are considering it, you need to know what is involved. If you have a question on this subject, or any other financial query that you want answering here on the show, then the best way to do that is to leave me a voicemail at meaningfulmoney.tv/feedback
Outro
That's it for this session of the MM podcast, I hope it was helpful. Did I miss anything? Do you have any questions? If so, please leave them in the comments section below
I hope you enjoyed this session. Thanks for listening – I'll talk to you next time.
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