One of the many perks of forming a limited company is the chance to be your own boss and take more control of your own career. Sounds great doesn’t it?
In return for the extra freedom, you’ll have to do a bit more admin than you would as an umbrella contractor. One of these additional responsibilities is completing a self-assessment tax return. But what are they all about?
We’ve created this handy self-assessment guide that tells you everything you need to know.
What are my obligations?
As a limited company contractor, you’ll need to make sure your tax liability is correctly calculated and that any tax owed is paid on time.
Your tax return will be issued shortly after the end of the tax year, which runs from 6th April to 5th April the following year. It’s important to remember that you’ll need to include your income from all sources, not just what you receive from your company.
The deadline for filing your tax return is 31st January each year, with an automatic £100 penalty charged if it’s late.
How do I pay tax?
Once you’ve calculated your tax bill for the year, you’ll need to make any payments due before the deadline. If this seems like too much hassle, a specialist contractor accountant (such as ourselves) can work everything out for you and let you know when it needs to be paid.
If you’ve not paid enough tax for the year, you’ll need to settle the remaining balance by the 31st January self-assessment deadline. Unsurprisingly, this is called the “Balancing Payment”.
In addition to any Balancing Payment you owe, you’ll also have to make two payments towards your estimated bill for the next tax year – known as “Payments on Account.” You won’t need to worry about this though, if:
- Income Tax (and National Insurance) liability for the previous tax year is less than £1,000 in total, or
- More than 80% of Income Tax (and any Class 4 National Insurance) liability for the previous year was paid by deduction of tax at source – including Pay As You Earn deductions and tax credits on dividends
Payments on Account are due on 31st January following the end of the tax year, and on 31st July.
We appreciate all this may seem confusing, so here’s a quick example to help straighten things out.
Sally’s first year under self-assessment is 2017-18 (the year ending 5th April 2018). For this tax year, her bill totals £3,000. She made two payments on account during the previous year, consisting of £900 each (£1,800 in total).
Sally must pay £2,700 in taxes by midnight on the 31st January. This is made up of:
- Her balancing payment of £1,200 for the 2017-18 tax year (£3,000 minus £1,800)
- Her first payment on account of £1,500 (half the 2017-18 tax bill) towards her 2018-19 tax bill
She must pay her second payment on account of £1,500 by midnight, on 31 July 2019. If her tax bill for 2018-19 is more than £3,000 (more than both payments on account), then she must make a balancing payment by midnight on 31 January 2020.
She will need to make payments as follows:
|Date of payment||Type of payment||Amount due|
|31st January 2019||Balancing payment for 2017-18||£1,200|
|31st January 2019||First Payment on Account for 2018-19 (50% of 2017-18 liability)||£1,500|
|31st July 2019||Second Payment on Account for 2018-19 (50% of 2017-18 liability)||£1,500|
|31st January 2020||Balancing Payment for 2018-19 (if the tax bill is greater than the two balancing payments)||Remaining tax from 2018-19|
Will I be charged interest or penalties for late payment?
If you don’t manage to pay what you owe by the deadlines, you’ll be charged interest until everything is settled. You’ll also have to pay a 5% surcharge on any tax outstanding on 28th February, increasing to 10% if still unpaid on 31st July. An additional 5% is charged if the amount is still unpaid by the following 31st January. This is why it pays to speak to the experts.
You’ll also have interest added on any overpayments you make to HMRC.
Can I reduce my payments on account?
If you think that the current year’s tax liability will be lower than the previous year’s, you can lodge a claim to reduce your payments on account.
Can any corrections be made to my tax return?
You can amend your tax return at any time within 12 months of the filing date. Any changes may cause interest and additional tax to be charged.
HMRC can correct a tax return within nine months of it being filed, to amend any obvious errors or mistakes.
Can HMRC make enquiries about my tax return?
If HMRC wants to conduct enquiries into your tax return, it will provide you with written notice within 12 months of the filing date. If not, the document will be final unless an error is discovered.
HMRC is not able to query anything on your tax return without first starting an enquiry. It’s worth knowing that this doesn’t automatically mean that your return is incorrect – HMRC may just want to check that the correct amount of tax has been paid.
What records will I need to keep?
You’ll need to keep records of any income, expenditure and reliefs you’ve claimed. Here’s a list of some of the things you may need to send to HMRC:
- Details of pay and tax deducted (P60 or P45)
- Details of expenses and other employment benefits you receive (Form P11D)
- Evidence of business expenses you are claiming (e.g. receipts or credit card statements)
- Details of any termination payments or share options awarded or exercised
- Interest and other investment documentation including dividend vouchers
- Gift Aid vouchers
- Personal pension plan certificates
Need more advice?
We hope we’ve been able to shed some light on your self-assessment responsibilities. If you want a bit more information, we’re here to help.
At ClearSky Contractor Accounting, we understand that you won’t have time in your busy WorkStyle to carry out all your administration by yourself. That’s why we’ll help lighten the burden and leave you free to concentrate on what you do best.
Our online portal lets you submit all your information any time day or night, whenever’s convenient for you. We’ll prepare a calculation of the tax you owe on your behalf and submit it directly to HMRC.
What’s more, our dedicated team of experts is on hand to answer any queries you may have – just another example of how we’re with you all the way.
For more information, please call 08000 861 406 or email firstname.lastname@example.org.