Five tax return mistakes contractors will make any day now…

With warnings about tax return tardiness now even being issued by the likes of Money Saving Expert, it’s probably best that contractors get some advice from the likes of us -- a full service accountancy firm and actual specialist in contractor taxation.

I’ll do that here, exclusively for ContractorUK, writes Matthew Townsend, head of tax at SG Accounting.

And I want to do it by flagging up five mistakes that contractors can’t afford to make this tax return season but often do when facing the January 31st deadline, which sees HMRC charge a £100 automatic penalty, plus interest at 7.25% on any late payments if you miss it.

1. Not checking your tax code

Everybody with earned income from a personal pension or employment has a tax code.

Your tax code is used by your employer or pension provider to work out how much income tax to take from your pay or pension.

HMRC will inform these parties which code to use but be aware this code can change if your circumstances change.

As a limited company contractor, you will still be an employee of your company and will have a tax code the same as any other employee.

Your tax code may be affected if you have benefits such as a company car. Your accountant can check your tax code for you.

If your tax code is wrong, you may have underpaid or overpaid tax.

As much as we’d all like to rely on HMRC to get tax codes right, there are errors.

So never assume your code is correct, especially if one of the following has applied to you in the recent past:

You’ve changed roles/jobs – HMRC could assume you have two jobs, especially if you were on a payroll and if your former employer hasn’t let HMRC know that you’ve left.

You have more than one income – If you do have more than one role on the go, then you could find that you’ve been taxed incorrectly on some of your income.

You’ve received employee benefits – if you benefit from company benefits such as a healthcare plan, medical insurance or a company car, this affects your tax code and you could find yourself being taxed wrongly.

You have more than one pension or you’ve recently retired – if you’ve recently started to receive the state pension, have retired or receive monthly from more than one pension, you should check you’re being taxed correctly.

2. Failing to declare all income

You have to declare all taxable income on your 2023/24 tax return, so that means you’ll need all those records, bank statements and invoices you’ve kept throughout the year.

If you are contracting through your own limited company, it makes sense to use the same accountant for your self assessment tax return as you do for your business accounting. That way, they will have a holistic view of your personal and business finances and be able to ensure that everything is accounted for.

Failing to declare everything could be deemed as tax evasion, so be sure to consider:

• all pay, including (if applicable) bonuses or benefits from work
• income on rental properties or holiday lets
• interest on savings
• investment income
• pensions and earnings from overseas
• state benefits, such as maternity/paternity pay
• proceeds from selling property, land or other assets (these are subject to Capital Gains Tax).

In addition, cryptocurrency-contractors beware!

In fact, if you’re a contractor who has crypto investments, uses cryptocurrency, or has earned income through staking or mining -- or have done in the past, you will need to complete a tax return and declare your crypto assets.

Be aware, any gains are likely to attract capital gains tax. And further be aware, HMRC is now able to identify crypto trades through links with the main platforms.

3. Incorrect personal details

As well as ensuring that HMRC has your correct name, address and contact details, you’ll need to check:

Your National Insurance (NI) number – this is the number used to track any National Insurance Contributions you have made since you received your NI number.

Your Unique Taxpayer Reference (UTR) number - a 10-digit number HMRC will have assigned to you. The number is unique to you and all correspondence with HMRC should include this number somewhere.

Any errors with your NI or UTR numbers can cause a rejection of your self-assessment return or delay processing your tax return.

Incorrect personal details could even cause you to start receiving penalties regardless of whether you submitted your return before the deadline of midnight on Jan 31st 2025.

4. Missing the deadline

Speaking of which, missing the January 31st deadline (which this month falls on a Friday) is probably the most common mistake that those who work for themselves make during tax return season.

As warned at the top, flouting the 31st at midnight immediately lands you a £100 penalty.

After three months, or if you fail to pay your tax bill, the penalty from HMRC goes up, and there will be a late payment fine added, with interest on any late tax added too.

Currently, that interest is pretty swingeing -- 7.25%.

You’re able to complete your tax return from the April prior to the due date, so you can understand HMRC’s stance that there’s plenty of time to get it done.

Many limited company contractors use an accountant to manage their business and personal taxes. If you do, you will still be responsible for providing relevant information to that accountant in a timely fashion for them to be prepare your tax return, and you will need to approve the return for submission. But the rest of the hard work will be done for you.

Last month, some 4,400 self-assessors chose to file on Christmas Day, of all days!

But HMRC said this week that some 5.4 million individuals still haven’t submitted their SA100 form for 2023/24.

Those new to self-employment ought to remember that if you haven’t completed a tax return in the past, you’ll need to register with HMRC and receive a Unique Taxpayer Reference (UTR) number.

Problematically -- if that’s you reading this right now, it can take weeks to receive your UTR after applying, so phoning HMRC, immediately, to inform them of the situation, is probably your best bet.

5. Forgetting about payments on account

In addition to paying your current tax bill, HMRC will estimate how much tax you owe for the upcoming year based on your previous year’s tax bill.

And then the Revenue asks you to pay this estimate over two instalment dates.

The aim is to help spread your tax payments across the year.

You can estimate your upcoming payment on account by halving your previous year’s tax bill. This will be a reasonable estimate unless your circumstances have materially changed since the last year.

Contractors and other self-assessors may also be asked to make an additional ‘balancing payment,’ should your payments fall short of the actual total tax bill.

As a reminder, the two annual deadlines for paying your Self-Assessment tax to HMRC are:

• Midnight on January 31st – yes, confusingly, it’s the same date as the final Self-Assessment tax return deadline! The Jan 31st cut-off is for any tax you still owe for the previous tax year, and your first ‘Payment on Account’ for the upcoming tax year.
• Midnight on July 31st for your second payment on account for the upcoming tax year.  

Finally, an HMRC penalty and interest recap…

This article opened with an alert about the cost of being late on Jan 31st, and it really can be significant.

As HMRC reminded this week -- with just three weeks to go before it can start charging, the penalties for late tax returns start with an initial £100 fixed penalty. Contrary to popular belief, the £100 penalty applies even if there is no tax to pay (or if the tax due is paid on time.)

After three months, HMRC says additional daily penalties of £10 per day, up to a maximum of £900 can be charged.

Next, if it’s six months and your tax return is still outstanding, the tax authority charges another penalty of 5% of the tax due -- or £300, whichever is greater.

Failure to file after 12 months results in an extra 5% being levied -- or £300 charge, whichever is the greater.

Lastly, keep in mind, the taxman can impose extra charges for paying late of 5% of the tax unpaid at 30 days, six months and 12 months.

In the event that the liability remains unpaid after the deadline, HMRC will also charge interest on the amount owed, in addition to the penalties above. With a penalty regime that ratchets up so rapidly, maybe those 4,400 Christmas Day filers had their priorities in the right place after all!