The ultimate tax return guide, revisited

This is an audio transcript of the Money Clinic podcast episode: ‘The ultimate tax return guide, revisited’

Claer Barrett
Hello, Money Clinic listeners. It’s that time of year. You know you should be starting on your tax return before the Christmas rush takes over. But you can’t quite muster the enthusiasm. Given the January 31st self-assessment deadline is only a couple of weeks away, we thought it would be a good time to open the Money Clinic back catalogue and dig out our episode on the eight A-Z of the tax return. In the cost of living crisis, there’s good reason to get ahead. Working out how much tax you need to pay long before January’s deadline means there’s more room for manoeuvre if you can’t afford to pay your bill in one big chunk. The latest figures from HMRC show the number of people asking to spread out their payments is increasing. You will need to pay some interest, but this could be a lifeline. Look up time to pay on the gov.uk website to learn more. And for now, sit back and listen to the rest of our top tax tips.

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Deep cleaning the kitchen, clearing out cupboards, descaling the kettle and even washing the bin . . . Talk about scraping the barrel. Well, when I was doing my tax return last month, these were some of the thrilling activities that I managed to distract myself with before getting down to it. Welcome to Money Clinic, the weekly show from the Financial Times. I’m Claer Barrett, the FT’s consumer editor. In this episode, we’re going to answer all of the questions about tax returns that you were too scared to ask. As 11mn people in the UK prepare to file their returns online, who needs to do one? What tips do our experts have to make the whole process easier, especially if you’re a freelancer or have a side hustle? And how could you legitimately reduce your tax bills or negotiate extra time to pay? Plus, we’ll demystify the jargon, pinpoint sources of help, and look into whether it pays to get an accountant. If, like me, you’re struggling to motivate yourself to tackle this year’s return, you’re not alone. We asked tax experts for the top queries they get at this time of year, as well as throwing it out there to my social media followers. I’m @ClaerB on Twitter and Instagram if you want to follow me. Some things the experts have to say may surprise you, like when some people choose to fill in their tax return.

Jacquetta Brown
If you want a funny figure, 2,700 people did it on Christmas Day last year Claer gasps), turned their tax return in. And the busiest time is between two and three in the afternoon.

Claer Barrett
HM Revenue & Customs tax specialist Jacquetta Brown.

Deborah Edwards
The longer you leave it, the worst the feeling gets, doesn’t it? When you actually (inaudible). Goodness’ sake, why didn’t I just get that done first of all?

Claer Barrett
And that was chartered accountant Deborah Edwards, who runs the money mentoring programme Raised Up Finance. Later on in the episode, she’ll reveal how to organise yourself throughout the year to make the January deadline less stressful. But let’s stick with the here and now and start with the basics. So go on, put that descaled kettle on, settle down and listen out for some hot tips on taking the stress out of tax filings.

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One of the arguably key considerations, having the money to pay the bill. Our chartered accountant Deborah, who we heard from just a moment ago, says that one of the biggest things that trips people up about tax is the timings.

Deborah Edwards
One of the main problems is the delay in the tax system. So for somebody who has a typical year where their financial year ends at the end of March and they don’t have to pay any taxes until January, you could make quite a lot of profit up until the end of March, have cash in the bank, spend the money and then by the time your taxes are due in January, you haven’t got that cash left.

Claer Barrett
The January 31st deadline is to pay tax generated in the financial year that runs April to April. Given your filing your tax return nine months after the tax year ends, there’s the stress of worrying whether you’ll have the money to actually pay the final bill.

Deborah Edwards
General rule of thumb, if you were to put aside 20 to 25 per cent of your income into a separate account, you would probably find that you’d saved a little bit too much. But you’ve got enough to pay your tax bill quite easily.

Claer Barrett
If you’ve never done the tax return before, or even if you have, getting into the right mindset can be difficult. I ask Deborah, how can we fight this urge to keep putting it off?

Deborah Edwards
So, first of all, don’t do it at times when it’s taking you away from your family, your friends, your hobbies, because you’ll end up resenting it. Make time for it, and treat it as a business function, say something that you do in your working time.

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Claer Barrett
OK, so you’ve mustered the willpower, you’re sitting at your computer, fingers poised over the keyboard . . . But hold on, there’s something else you’ll need before you can get cracking. And it’s called UTR. Deborah, this sounds like a medical problem.

Deborah Edwards
The UTR is your unique tax reference number, and it’s what everybody gets given when they register for being self-employed.

Claer Barrett
You do this on the gov.uk website. You’ll need to generate a government gateway ID, and bear in mind, it can take up to 10 days for this to arrive through the post. In the meantime, HMRC’s Jacquetta says you can crack on with the paperwork.

Jacquetta Brown
Make sure you’ve got your passwords ready before you still. Make sure you’ve got your papers ready before you start. Have you got things like your bank statements, bank and building society interest you might have received, dividends you might have received from the shares you inherited from Uncle Albert or whoever? And those sorts of things so you’ve got it all there, and you can go through it.

Claer Barrett
But let’s rewind for a sec . . . Who needs to fill out an annual tax return anyway? Around 11mn people in the UK. They include anyone who makes more than £1,000 as a freelancer or side hustle income alongside that main job. Anyone who earns more than £100,000 a year, even if they’re in full-time employment. Any parents earning more than 50,000 a year who claim child benefits? So what about that thousand pound trading allowance as it’s known. I got quite a few messages on Instagram from people who’ve been generating some extra income alongside their main job and were wondering at what point do they need to start doing a tax return.

Jacquetta Brown
If you are running a very small business, so you’re making craft items and sending them that type of thing, and your total turnover, now that’s turnover not profit, is under £1,000, then you don’t need to tell us at all. We’re really not worried about it. That’s fine. You know, carry on doing it. Just make sure it doesn’t go over £1,000 in a tax year, which, of course, is from April to March.

Claer Barrett
But what counts towards this thousand-pound limit? I asked Jacquetta if it would include extra income generated from selling your old stuff online.

Jacquetta Brown
Now, it’s a little bit of a distinction between when you’re in a trade or when you’re not. If you are simply selling old stuff that you already own, you know, old clothes, old household gadgets, whatever it is, then that definitely isn’t a trade. You haven’t got anything to worry about. If, however, you are buying stuff in order to sell or making stuff in order to sell those sorts of things and very likely to be a business, you’re doing it to make money. And in that case, you do need to let the tax office know.

Claer Barrett
This is where the tax term sole trader comes into play. Deborah . . . 

Deborah Edwards
So a sole trader is somebody who operates their business under their own name, and legally the business and yourself are one of the same.

Claer Barrett
If you’re renting out a room in your home either to a lodger or using apps like Airbnb, Jacquetta points out you can keep even more of the money.

Jacquetta Brown
You can get what’s called rent-a-room relief, and you can have up to £7,500 a year income from that without having to declare it to us at all.

Claer Barrett
That’s good to know. But for all the freelancers or sole traders out there, how do you go about calculating your turnover and profit? Deborah explains.

Deborah Edwards
So turnover is just a different word for sales for revenue. So how much money you bring into your business. And then profit is what you have left after all of your costs have been taken out of your sales and you only pay tax on the profits.

Claer Barrett
This is a really crucial distinction and one that was sadly lost on me when I did my first of a tax return many years ago. So what costs or expenses can you legitimately deduct from your profits to get that tax bill down? Common examples are office costs like stationery or phone bills, travel costs, stock or raw materials you might sell on, paying for advertising or marketing, plus the cost of your business premises, even if you work from home. There are lots of rules about how much you can claim and what can and can’t be claimed for. But Jacquetta says the basic rule of thumb is this, any expenses have to be generated solely for business purposes.

Jacquetta Brown
One of the old ones we’ve had is guard dogs. The family pet (dog barks) is not a guard dog, and we do see that fairly often. We’ve also got things like buying stuff for personal use. The fact that you have to dress smartly in your job doesn’t mean that you’re not wearing ordinary clothes. You can’t claim for those. You can’t claim for meals out just because you’re not at home or staying in hotels.

Claer Barrett
And are there expenses that people forget to claim.

Jacquetta Brown
There are also variations, buying tools and equipment you can claim for these in a special way. It’s called capital allowances.

Claer Barrett
Then what about if you’re using something partly for work and partly for personal use, like a phone or car or even electricity?

Jacquetta Brown
If you used to call 50-50 for business, you claim 50 per cent of those expenses. If you use your car, 90 per cent for business, you claim 90 per cent of those expenses.

Claer Barrett
If your turnover is over £85,000 a year, then you also need to register for VAT, value added tax. But if you use an accountant to help you with your tax return, the good news is you could even put your accountancy fees on expenses. Crucial to claiming these expenses, Jacquetta says, is keeping good records.

Jacquetta Brown
Whether it’s a folder in your outlook on your emails or whether it’s a shoe box, have one place where you put everything like that straight away, and it makes life so much easier. A carrier bag is a record keeping system as long as you put stuff in it (Claer chuckles). It doesn’t have to be sophisticated.

Claer Barrett
Now for some quick-fire questions from some Money Clinic listeners. Thanks to everyone who reached out.

Listener 1
On my self-assessment, as well as paying the tax I owe, do I also need to make National Insurance contributions?

Claer Barrett
My answer to this is yes. This is something that self-employed people really need to stay on top of. Jacquetta, what do you think?

Jacquetta Brown
What I would say is you need 35 years worth to get your state pension on the current rules. So it will be worth contacting HMRC and saying, can you tell me what my national insurance contributions record is?

Claer Barrett
If you find you have missing years, a common problem for freelancers, you can pay to top them up known as a voluntary contribution.

Jacquetta Brown
You make a payment of a few hundred pounds a year for each year you want to do it. You can actually backdate years as well.

Claer Barrett
The final question . . .

Listener 2
At what point is it worth getting an accountant, and how much does it cost?

Deborah Edwards
So generally, for a really straightforward set of accounts and tax return for a really small business, you shouldn’t be looking to pay very much, just a few hundred pounds. And you can make that cost less if you keep really, really good records.

Claer Barrett
And don’t forget, accountancy fees can be a tax deductible expense. If you move from being a sole trader to a limited company, you will definitely need the services of an accountant.

Deborah Edwards
Depending on your level of turnover, it could be more tax efficient to be a limited company. You also can protect your personal assets if you have a limited company. So if the business went bust and you owed a lot of money, your home is protected.

Claer Barrett
If you’re a listener with a side hustle, you’ll need a few documents to complete your tax return that will help HMRC see what you’ve made from employment and what you’ve made on the side and need to pay tax on. Now, anyone doing a tax return who needs to lay their hands on quite a few forms, beginning with the letter P, Deborah, could you just walk us through some of the common P forms and what they’re for?

Deborah Edwards
Yeah, so, if you are employed, then at the end of the tax year, you’ll be given a P60. And that will give you a really nice summary of how much salary you’ve earned and how much tax you’ve paid during that year. If you’ve left employment during the year, then you will have been given a P45, and again, that information will tell you how much you earned in the tax year up until the point you left. And then P11d is how businesses and employers report your benefits.

Claer Barrett
If you’re knee-deep in a chaos of forms, receipts and bank statements, one question you might have is, how can I make doing all of this less of a hassle next year? Over to Deborah.

Deborah Edwards
So my advice would be, first of all, to make it a regular habit. So one thing that I say, you know, is Monday money, to spend the first hour, hour and a half, getting your information together and having a look at your bank account.

Claer Barrett
Little and often is the key.

Deborah Edwards
Is that how do you eat an elephant thing, you know, one bite at a time. And it’s the same with finances and taxes. You’re not faced with a massive job at the end of the year.

Claer Barrett
One thing you might want to consider is downloading an app to keep track of your turnover, profit and expenses. Most come with a free trial and then cost just a few pounds per month.

Deborah Edwards
You need to make it as easy as you can. And one of the best ways of making it easier is to use one of the brilliant apps and cloud-based accounting systems that are available now. So the best one that I think is available at the moment is Xero. It’s really intuitive, but most of all it integrates really well with things like bank accounts and other apps.

Claer Barrett
Deborah’s other key piece of advice? Keep a separate business bank account.

Deborah Edwards
This has so many benefits. So first of all, you’ll be able to really easily identify what needs to go into your account. But most importantly, you’ll be able to judge how your business is doing. The best ones, in my opinion, are the ones that mean you can really easily access information. They have a really good app on your phone. So a lot of the new challenger banks are really good. One’s like Tide, I use personally. Starling a pretty good.

Claer Barrett
As Deborah says, Tide and Starling, who’ve both designed accounts especially for sole traders that have no monthly fees and can automate a lot of these processes for you. Their apps will sync with accountancy software. You can upload receipts and store them digitally until needed, and for a small monthly fee, extra tools can help you generate and track whether invoices have been paid, categorise your business expenses. And the Starling app will even estimate how much tax you’ll have to pay. If you have even more questions about your tax return or stumble across doubts as you’re filling it in, there are plenty of places you can turn to for guidance. HMRC has its own YouTube channel, which I would highly recommend. They also have webchat, a phone line and you can reach out to them on Twitter. Jacquetta also stresses that if you can’t afford to pay your tax bill, don’t risk a late payment fine by burying your head in the sand.

Jacquetta Brown
Anything to do with paying HMRC and problems, get in touch with us. We do understand that people have difficulties and that lots of people are quite insecure in where their money’s coming from or when. If you need time to pay arrangements, we will try and discuss this with you and talk it out with you so that you can spread it out over slightly longer to make it easier. What we don’t want people to do is to avoid us because they don’t know what’s going on and then get into trouble because we will chase you out. And it will cost you more, which we don’t actually want. We want to help you now. If you have to estimate some figures on the tax return because you haven’t got the information do that. There’s a box to tick just to (inaudible) provisional figures. You’ve then got 12 months to go back and finish them.

Claer Barrett
And finally, before we wrap up, a problem all listeners of Money Clinic will surely aspire to have, the need to complete a tax return when you start earning a six-figure salary. That’s right. Even if you have a job and pay tax via your payslip, when you earn over £100,000, you also need to complete an annual return. I asked Deborah, how so?

Deborah Edwards
One of the things that happens once you earn over £100,000 is you lose £1 of your tax-free personal allowance for every £2 that you earn. So you’re actually having to give back one of the tax benefits that everybody else gets.

Claer Barrett
The personal allowance means that we don’t pay tax on the first £12,500 of income. But this changes when you earn over £100,000. Effectively you’re being taxed at 60 per cent on the slice of your salary between 100 and 125,000. And this means you’ll need to pay some extra tax, as Jaquetta explains.

Jacquetta Brown
The problem is almost everyone in that position has income that varies from year to year because they very often have little bits of other income. They might have bonuses. They might have company benefits so we can’t know in advance what that’s going to be and build in the tax code.

Claer Barrett
A final tip from me, one way higher earners can reduce their tax liabilities is by sacrificing more of their pay into their company pension scheme. I’ve written an article all about this, and it’s free to read via a link in today’s show notes. If you earn six figures, this could save you thousands of pounds in tax.

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That’s it for this episode of Money Clinic. Once you’ve got your tax return out of the way, you can start thinking about your financial resolutions for 2023. And we’ll have plenty of tips for you on that in the new year. In the meantime, we’re still recruiting guests for our upcoming shows. If you’ve got a money issue that you’d like to talk to me about, then get in touch. Our email address is money@ft.com or DM me on Twitter or Instagram. I’m @ClaerB. I may even post a few sneak previews of our upcoming episodes. Money Clinic was produced by Persis Love and Philippa Goodrich. Our executive producer is Manuela Saragosa. Our sound engineer is Breen Turner. And the original music is by Metaphor Music. And finally, the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s the small print over and done with. See you back here next week. Goodbye.