I’m doing my first tax return: what do I need to know?

The tax return – or self assessment – is how you report your taxable income and pay tax on it. Typically people who are setting up as sole traders, renting out property or have income outside PAYE earnings will need to do a tax return.

The criteria for having to do a self assessment tax return are covered in our article Who needs to do a tax return? So, if you have realised you have to start doing a tax return – what happens next? Well, first of all, new self assessment taxpayers have to register with HMRC.

Registering with HMRC

To set up an online HMRC account you will need to apply for a unique taxpayer reference (UTR) number on gov.uk. This often takes about two weeks to arrive in the post. This number will be found on your tax correspondence with HMRC if you lose it.

You will also receive a 12-digit Government Gateway ID, which is required for getting into your online account. A replacement will take a little while to arrive so make sure you keep a record of it in a safe place.

In addition, for your first self assessment you will receive an activation code, also in the post. This is necessary for completing your registration for self assessment.

Try to do all of this in good time. If you start doing it after Christmas you will be putting yourself under stress, as you will also have to navigate the unfamiliar self assessment form in time to get any payments due to HMRC by its 31 January annual deadline.

Using an accountant

The self assessment document runs to more than 20 pages and is a forbidding sight to those unaccustomed to it.

It is difficult to complete accurately, especially first time around. The non-tax professional may find he or she simply doesn’t understand some questions or know for sure which sections to fill out and which to skip. Furthermore, mistakes carry the risk of incurring interest and fines. While innocent errors will be treated more leniently than deliberate evasions, nonetheless, any penalty is an extra cost that any business will want to avoid.

Tax returns are the bread and butter of accountancy practices, and many offer fixed price deals, which can be surprisingly good value, especially when you take into account the opportunity cost of the time that you will spend doing the return. Doing a self assessment can easily take up to two days if record keeping has not been up to scratch.

Getting the return done professionally also buys peace of mind and the knowledge that all possible allowances have been claimed for. And it is often the case that the cost of the accountant’s fees is less than the money saved by claiming all relevant allowances to their maximum.

Business bank account

One of the first questions someone going into self assessment will be asking is, do I need a business bank account. Generally the answer is no, but limited companies must have one and so should businesses with a substantial turnover, which is not specifically defined by HMRC.

Typically a high street bank will charge £8.50 a month or thereabouts to operate a business account; however, offers that waive the fee for the first year are common. Online-only banks are cheaper. A simple option for sole traders or landlords is to open a second personal current account for the business, and make sure they keep all personal expenditure and income out of it. Most banks offer free personal current accounts.

What goes into the tax return?

You will need to tell HMRC about your various sources of income, even those you have already paid tax on.

Paid employment

You will need to include your paid employment if any in the tax return despite your already having paid income tax on that work. The figures for this will be found on the P60 your employer gives you at the end of every tax year. You must include the employer’s PAYE tax reference in the tax return, which will be found on the P60 or your payslips.

The income tax you have already paid will be set off against your tax bill so it is very important to include it.

Income

This is where having a bank account dedicated to your business is so helpful. Working out your income for the year is simply a matter of logging all the credit entries for the 12 months. Of course, many sole traders will use accounting software making life even easier. HMRC only requires a total figure – you don’t have to break it down by client or type of work undertaken.

Expenses

It is vital to keep track of expenses as many of them can be used to reduce your tax bill. Landlords can no longer set off mortgage finance costs but they can claim for repair costs, legal and estate agents’ fees, service charges, ground rent, insurance and necessary travel expenses.

Traders can claim for home working costs, premises costs, office supplies costs, clothing, staff salaries, raw materials and stock, financial costs such as insurance, marketing and training.

Allowances

On top of your personal allowance of £12,570 a year you can claim an annual trading allowance of £1,000 if you do not claim for expenses as set out above. Similarly, landlords can claim either £1,000 or actual expenses. These sums are deducted from your taxable income.

Self-employment

This is where good record-keeping comes in. You must accurately record all income and allowable expenses from self-employment, whether by using your bank statements – probably the most reliable method – or invoices and other documentation.

If your self-employment is in the form of providing services rather than supplying goods, it can become a complex question as to whether you are employed or self-employed if you work long term for the same company.

The main criteria for employment status are as follows:

• Mutuality of obligation, that is, if the employer asks you to do work, you must do it.
• The inability of the worker to delegate work.
• The nature of any contractual relationship.
• The level of oversight the employer has on how the work is done.

However, there is no simple test for employment versus self-employment so you should seek advice about whether to class continuing work for the same company as employment or self-employment.

Cash basis accounting

You will come across this term before long once in the world of self assessment. It is the most straightforward form of accounting for sole traders. The alternative is accruals basis accounting, which is used by limited companies and is outside the scope of this article. Cash basis accounting simply means you record income and costs at the date the money goes in or out of your bank account. Thus if you issued an invoice in the 2024-25 tax year but were paid in the 2025-26 tax year, the amount received goes in your 2025-26 return.

Partnerships

If you are a partner in a business you must do a tax return.

Landlords

Those in the now challenging buy-to-let market must do a tax return. Unfortunately, since changes introduced by George Osborne when chancellor of the exchequer, took full effect in April 2020 mortgage finance costs can no longer be set off against tax. Instead there is a basic rate allowance of 20% of mortgage finance costs. HMRC will do the calculation for this when you submit your tax return.

Foreign income

Foreign income is income and must be declared. HMRC has reciprocal information-sharing agreements in place with other tax jurisdictions, so this income is potentially visible to the taxman whether it is declared or not.

Trusts

Income from trusts should be included in the return. Such income can be found on HMRC’s R185 document, which can be obtained from trustees.

Capital gains tax

Disposal of a non-property asset should be included in the return for the tax year after the asset was sold. If you sell a non-residential property you must report the sale and pay capital gains tax within 60 days of the completion date, so most sellers will be settling this bill outside the tax return.

National insurance

This comes in four types:

• Class 1 is paid by company employees.
• Class 2 is paid voluntarily by sole traders whose profits are less than £6,725 a year at a rate of £3.45. This protects their NI record.
• Class 3 is for people with gaps in their NI record, for example, those who take time out of the labour market to bring up children. The current weekly payment rate is £17.75.
• Class 4 is paid by self-employed people.

Dates and deadlines

Some key dates and deadlines that you should be aware of.

The tax year runs from 6 April to 5 April every year.

The self assessment deadline is 31 January. Both the return and any tax owing for the previous tax year, which would have ended on 5 April the year before, must be with HMRC by this date.

There are also two payment on account deadlines. The first is 31 January and the second is 31 July of the same year. They relate to the tax year that ended between these dates. Any balance still owing after 31 July is paid at the next 31 January deadline.

If you need to do a tax return but HMRC has not asked you to, the deadline to inform the tax authorities is 5 October for the just-concluded tax year.

If you have further questions about self assessment or would like advice about any aspect of tax or your business, please contact Finsbury Robinson. We are a full-service tax, accountancy and business advisory firm, and our friendly and highly experienced team is available on 020 8858 4303 or via email at info@finsburyrobinson.co.uk