Ditch The Jargon – UK Self-Assessment Explained
Understanding Self Assessment can be challenging for many self-employed people. The technical information can be difficult if not impossible to understand, while – let’s face it – it’s hardly the most interesting subject. And the use of tax terminology rather than plain English can literally leave many people scratching their head when they’re reading information that should guide them.
Written for Expat Network by GoSimpleTax
Here are a few basic facts that you should know about how Self Assessment works if you’re self-employed, as well as plain English explanations of key UK Self Assessment terms that’ll you’ll often read or hear.
What is Self Assessment and how does it work?
- Self Assessment is the system that UK tax authority HMRC (HM Revenue and Customs) uses to collect Income Tax.
- The UK tax year runs from 6 April until 5 April in the following year. If you need to declare income via Self Assessment and didn’t file a tax return in the previous tax year, you must register by 5 October in your second tax year. Otherwise – you could be fined.
- You can register for Self Assessment via government website GOV.uk. When you register for Self Assessment, as a self-employed person, you’ll be registered for Income Tax and National Insurance.
- Self-employed people – also known as Sole Traders – and others with income that is subject to Income Tax, must report it to HMRC each year via a Self Assessment tax return (SA100 and any supplementary pages that are required), so that HMRC can work out how much Income Tax and National Insurance is payable.
- You file your Self Assessment tax return after the end of the tax year it applies to and you have until midnight on 31 January to file it online.
- You’re required to maintain accurate financial records, so that you can fill in your tax return correctly. You must retain proof of business expenses that you claim.
- You can claim tax reliefs and tax allowances, which reduce your profits and tax bill. Many of the costs you pay when running your business can be claimed as “allowable expenses”.
- HMRC can charge you interest and a penalty if you do not file your Self Assessment tax return and pay any tax due before the deadlines.
- You must submit a Self Assessment tax return if HMRC has asked you to do this (via a “notice to file”) and hasn’t cancelled or withdrawn that request, regardless of whether you believe your income is taxable.
- The deadlines for paying your Income Tax bills are:
- 31 January for any tax you owe for the previous tax year (called a “balancing payment”) and your first payment on account
- 31 July for your second payment on account.
- Software and apps can make managing Self Assessment far easier. You can pay others to complete and file your Self Assessment tax return or get them to check it if you complete your own Self Assessment tax return. This can provide added peace of mind.
Self Assessment glossary – what does the jargon actually mean?
Accounting year – the 12-month period covered by your business’s accounts, which may or not be the same as the UK tax year (ie 6 April-5 April).
Allowable expenses – business costs that HMRC allows you to deduct from your profits. These reduce your profits and resulting Income Tax bill.
Annuities – a long-term investment issued by an insurance company that’s designed to protect you from the risk of outliving your income. If applicable, details must be given in your Self Assessment tax return.
Balance sheet – a report (usually produced by accounting software) showing a business’s assets and liabilities at a specific time or at the end of the trading or tax year.
Capital allowances – to reduce your profits and Income Tax bill, you can claim capital allowances when you buy capital assets that you keep for use in your business (eg equipment, machinery and vehicles).
Capital Gains Tax – a tax on the profit you make when you “dispose of” (ie sell) an asset (eg property) for more than you paid for it. You provide details of your gain via Self Assessment and pay tax on the gain.
Gross profit – your total sales (also called your “turnover”) minus your cost of sales and direct costs. Your cost of sales are your day-to-day business running costs (ie your overheads or fixed costs), while direct (or variable) costs are those linked directly to the production/supply of specific goods or services.
Income – money your business receives for the products and/or services it sells to its customers. The money you receive is your personal income.
Late-filing – when you fail to submit your Self Assessment tax return before the deadline. You’ll pay a late-filing penalty of £100 if your tax return is up to three months late (more if it’s later or if you also pay your tax bill late).
Marriage Allowance – enables you to transfer £1,260 of your Personal Allowance to your husband, wife or civil partner, thereby reducing their tax by up to £252 in the tax year.
National Insurance contributions – contributions you pay to qualify for certain benefits and the State Pension. Self-employed people pay Class 2 and Class 4 National Insurance contributions (NICs).
Net profit – your gross (ie total) profit minus indirect costs and expenses.
NINO – National Insurance number; ensures that your National Insurance contributions (NICs) and tax are only recorded against your name.
Ordinary partnership – a business formed by two or more self-employed people. In law, the people and their business are the same thing, so the partners are both liable for the partnership’s debts.
Personal Allowance – the standard Personal Allowance is £12,570 (2022/23 tax year). This is the amount of income that you can earn without having to pay tax.
Revenue – total income generated by the sale of goods and services that your sole trader business makes.
SA100 – the main Self Assessment tax return that you need to fill out and file. Sole traders often have to complete and file supplementary pages to provide more details about their income or expenses.
Self Assessment – the system that the UK tax authority HMRC (HM Revenue and Customs) uses to collect Income Tax.
Self-employed – working for yourself as a freelancer, contractor, agency worker or business owner, rather than being employed by an employer.
Simplified expenses – a quicker and more convenient way of calculating some business expenses using flat rates instead of working out the actual cost. HMRC allows this. Can be used for vehicle and fuel costs.
Sole trader – an alternative term for being self-employed. In law, there’s no distinction between you and your business. You can keep all of the profits after you’ve paid tax on them – but you’re personally liable for business debts.
Tax relief – these enable you to pay less tax to cover money you’ve spent on business expenses or costs if you’re self-employed or to get back tax or have it repaid in another way (eg into a personal pension). You get some types of tax relief automatically, but you must apply for others.
Tax year – 12-month period covered by a Self Assessment tax return. It’s the same for everyone who pays tax via Self Assessment – 6 April until 5 April the following year.
Trading allowance – the first £1,000 of income that you earn from self-employment is your trading allowance and it isn’t subject to tax.
UTR – Unique Taxpayer Reference – a 10-digit code HMRC uses to identify self-employed people and their businesses for tax purposes. You need to include it in your Self Assessment tax return.
Still unsure, don’t worry GoSimpleTax is jargon free software which allows you to record income, expenses and submits directly to HMRC. It is the solution for non-residency returns, the self-employed, sole traders, freelancers and anyone with income outside of PAYE. The software will provide you with hints and tips that could save you money on allowances and expenses you may have missed.
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