Top 10 tax return tips for contractors
October marks the start of the tax return season, a necessity for contractors.
Here, TaxScouts outline 10 of the best tax return tips for self-employed people mulling over their 2020/21 tax return.
1. Don’t forget the deadlines
Rule number one for tax returns is to know the deadlines. The tax filing deadlines for this year are:
- Income tax filing deadline (paper): October 31st
- Income tax filing deadline (online): January 31st.
2. Make sure you register for self-assessment
If you are planning to submit a self-assessment tax return for the 2020/21 tax year and haven’t done so before then you need to register for self-assessment. This let’s HMRC know that you are earning untaxed income as a contractor.
You can register for self-assessment here.
Through registering, you’ll be sent a Unique Taxpayer Reference (UTR) number. You need a UTR number to submit your tax return, and it can take a month or more to get one so make sure you apply as soon as possible.
3. Understand the tax year
The tax year is not a calendar year. It runs from April to April.
The last tax year where the deadline to pay your bill is coming up ran from April 6th 2020 to April 5th 2021.
4. Check your tax code
If you’re not self-employed, you’re taxed directly from your salary via a tax code. But if your tax code is wrong then you could end up paying too much tax. TaxScouts has a good article on understanding your tax code. Check your tax code and if you’re concerned that it is not correct then contact HMRC as soon as possible.
5. Familiarise yourself with tax reliefs
Before submitting your tax return you should familiarise yourself with the ways you can reduce your tax bill. These could include:
- Claimable expenses (more details on this later)
- Tax-free allowances
- Relief on charitable donations
- Private pension contributions
A useful tax relief to be aware of is the Trading Allowance. This allows you to earn up to £1,000 of self-employed income tax free using the Trading Allowance.
6. Understand what you can / can’t expense
When your tax liability is calculated, business expenses can be deducted from your overall earnings so that you are only paying tax on your profits.
You can only claim expenses for costs that are ‘wholly, exclusively and necessarily’ for your business.
7. Do not forget about Payment on Account
If your tax bill is more than £1,000, you may be expected to pay towards next tax year in advance.
The first ever time you file, your bill will be higher than you expect. This is because you pay for the full year you’ve worked and 50% of the next tax year up front. The final 50% of the next tax year’s bill will be due in July. This is called Payment on Account.
8. Get a business bank account
This seems like a basic piece of advice, but a business banking account can be very important for busy, contractors to separate business and personal finances. It’s really useful when it comes to submitting your tax return because it saves you from having to manually sift through your bank statements.
9. Declare income from PAYE jobs
Some contractors might also have PAYE jobs. When submitting a self-assessment to ensure you pay tax on your contracting income, you will also need to declare the income you have made from a PAYE job (even though tax has been deducted throughout the tax year).
You should ask your employer for a P60 or P11D, which will show the tax you have already paid via PAYE. You can also get this information from your HMRC online account.
10. Know the income tax and National Insurance thresholds
The tax thresholds will dictate the amount of tax you owe on your self-assessment. The amount you owe will be calculated for you, but it’s good to know the basic thresholds:
- 20% on income <£50,270
- 40% on income >£50,271
- 45% on income >£150,000
- £159 per year on income over £6,515
- 9% of profits over £9,568