Tax return timescales for a new business?

Question
Is it true that new sole trader businesses have two years to complete their tax return?Answer
Not as such, although depending on when you start the business you could have well over a year before your tax return is due and any tax paid.

Sole traders must declare and pay tax on their business profits via the self-employed section of the self-assessment tax return. The tax return must be completed by 31 October following the end of the tax year if a paper version, or 31 January if online.

So, suppose you start trading on 6 April 2010, your first tax return (for the 2010/11 tax year) will cover from 6 April 2010 until 5 April 2011. This return must be submitted by 31 October 2011 or 31 January 2012 depending on whether it’s paper or online.

The self-employed must usually pay any income tax owed in instalments, on 31 January and 31 July. The 31 January payment is during the tax year concerned and usually equal to half of your previous year’s tax bill, it’s called a payment ‘on account’. A second payment, usually the same amount, is then due on 31 July that year. The following January 31 payment will then include a balancing payment (or refund) based on your actual profits, as well as the next payment on account.

However, as a new sole trader you won’t have paid tax in the previous year so your payments on account will be zero (payments on account only apply if your previous year tax bill was at least £1,000).

To carry on our above example, you won’t have to pay tax on 31 January 2011 or 31 July 2011, just a single payment by January 31 2012 (for the 2010/11 tax year).

If you set up a limited company your business will then come under the corporation tax regime, which has a different set of timescales based on your company’s financial year.

For example, if you set up a company now with a financial year end of 28 February, your first accounting period would end 28 February 2011. Your company would have to pay corporation tax for this period by 31 November 2011 (9 months after the end of the accounting period) and file a company tax return by 28 February 2012 (12 months after the end of the accounting period).

Read this Q and A at http://www.candidmoney.com/questions/question113.aspx

Tax Return Tips

If, like me, you’ve yet to submit your 2008/09 self-assessment tax return, then get a move on to avoid a possible £100 fine and interest on unpaid tax.

And, if you’d rather watch paint dry, just remember that completing your tax return provides an opportunity to claw back money from the taxman by claiming for legitimate reliefs, allowances and expenses.

So, for my benefit as much as yours, I’ve put together some self-assessment reminders and tips.

Deadline

The deadline for filing a 2008/09 paper tax return (covering 6 April 2008 to 5 April 2009) was 31 October 2009. Your only option now is to file online via the HMRC website by midnight on Sunday 31 January 2010.

Who needs to complete one?

If you’re an employee who has no other sources of income and pays tax through PAYE then probably not. If you fall into one or more of the categories below (or HMRC has sent you a tax return) then very likely yes:

Self employed. Company director. Minister of religion. Receipt of rental income from land or property. Annual gross income from savings/investments of £10,000 or more. Claim against tax for expenses or professional subscriptions of £2,500 or more.

Receipt of untaxed income which cannot be handled via PAYE. Receipt of foreign taxable income. Receipt of income from a trust. Annual income of £100,000 or more. Owe tax at the end of the tax year that cannot be collected via PAYE the following year. Selling shares or other investments at a profit.

You can find out more here.

What you need to do to file online

To file your tax return online you’ll need a Government Gateway account that’s activated for self-assessment. If you’ve done so before you simply need to dig out your Gateway user id and password then login at https://online.hmrc.gov.uk/self-assessment/. If you’ve forgotten your user id or password you can retrieve either online. If you’ve forgotten both call the HMRC online services helpdesk on 0161 930 8445.

If you don’t have a Government Gateway account and/or haven’t activated it for self-assessment then you should register via the same link above by 21 January to allow time for your self- assessment activation code to be sent by post. When registering you’ll need your Unique Taxpayer Reference (UTR) and either your national insurance number or postcode.

Completing the return

Although you’ll complete your tax return online, you might want to look at the paper version beforehand to familiarise yourself with the various sections. The accompanying help sheets can also be useful – view a full list of forms and help sheets here.

I also find it much easier to prepare all the figures beforehand, e.g. on a spreadsheet or using accounting software, so that by the time you complete the form online you’re simply entering figures in boxes.

If you’ll be entering blanks where you previously entered figures, perhaps due to a change in circumstance, it’s worth explaining why in the ‘additional notes’ boxes so as not to arouse HMRC’s suspicions.

Plus, don’t forget you’re allowed to round down income and round up expenses entered on the return to the nearest Pound (e.g. £80.90 of income becomes £80 and £21.10 of expenses becomes £22). Do this wisely and you could save a few extra Pounds.

Once completed, print a copy of your tax return for your records.

If you’re employed (i.e. PAYE)

Check that your employer has already deducted any tax owed on benefits (e.g. company car and medical insurance) from your salary; otherwise you’ll likely need to declare and pay the tax via a tax return.

You might be able to claim back some tax if you’ve incurred expenses ‘wholly, exclusively and necessarily’ in the performance of your employment which haven’t been reimbursed by your employer. In practice this means that you can't claim for a new suit or travelling to the office, but you probably can claim for items such as professional subscriptions, travel/subsistence away from the office and the proportion of your mobile phone bill used for work (but only if your employer doesn’t reimburse you).

Also, if you’ve stopped working or changed employer during the tax year double check you’ve not paid too much or little tax via PAYE using your P45 and/or P60 forms. The last time I did this I claimed back over £1,000!

If you’re self-employed

In general you can deduct all costs incurred for the ‘sole purpose of earning business profits’ from your turnover (excluding entertainment). This includes items such as goods purchased for resale, rental of business premises, vehicle costs and electricity/telephone.

Where the costs relate to both private and business use, e.g. working from home and using a car for business and domestic purposes, then you’ll need to split the costs between business and private use – you can only deduct the business costs. HMRC has a guide here.

Capital Expenses (both self-employed & employees)

If you buy 'capital' items for work which have a life of several years, e.g. a computer or machinery, you can claim a proportion of the cost each year over a period of time using 'capital allowances'. But, provided the total expenditure is £50,000 or less the cost can be fully claimed in the year of purchase under the ‘Annual Investment Allowance’ (with a few exceptions, primarily cars).

Although less common for employees, you might have a clam if you have to buy equipment to carry out your job and your employer doesn’t reimburse you. More details here here.

Don’t forget to re-claim

Failing to claim the allowances, reliefs and expenses you’re due is the same as giving the taxman cash straight from your pocket. So claim as much as you’re allowed. In addition to those mentioned above, common reliefs and allowances include:

Pension contributions – higher rate taxpayers can reclaim additional higher rate tax relief on their pension contributions (e.g. if you contributed £800, basic rate tax relief of £200 will have automatically been given and you can claim a further £200). Employees should check this hasn’t already happened via PAYE.

Charitable donations – under the Gift Aid scheme higher rate taxpayers can reclaim tax equal to 25% of the contributions made (e.g. if you contributed £100 you can claim £25 – the charity will have already reclaimed the basic rate tax relief).

Venture Capital Trusts/Enterprise Investment Schemes – you can get an income tax rebate of 30% (VCTs) or 20% (EIS) on your investment provided you meet the qualifying rules.

Note re: the above rebates – you can’t reclaim more tax than you’ve actually paid/owe!

Capital Gains Tax – remember you have an allowance of £9,600 to offset against gains you made during 2008/09.

Property rental – if you rent property remember to claim for allowable expenses, including mortgage interest and 10% of rent as a ‘wear and tear’ allowance. There’s lots of helpful information here.

Paying tax

Once you’ve worked how much tax, if any, you owe, you must pay HMRC by 31 January 2010. You can make payment by direct debit, internet/telephone bank transfer, cheque, bank Giro or debit/credit card (through Billpay with a 1.25% fee for credit cards).

What happens if you’re too late?

Fail to submit your tax return by 31 January and you’ll be slapped with an automatic £100 fine, with a further £100 fine on 31 July if your tax return is still outstanding. HMRC can also levy a daily fine of up to £60 if you persistently fail to submit your return.

However, the penalty is normally limited to the tax you owe on 31 January. So, provided you don’t owe tax, HMRC shouldn’t charge you for filing a late tax return. This means you could avoid a fine by paying a liberal estimate of the tax you owe by 31 January and subsequently reclaiming any surplus once you’ve submitted your return. HMRC currently pays 0.5% interest on any credit.

If you don’t submit a return then HMRC might send a request for payment, called a ‘determination’, which estimates the tax you owe. The only way to change the amount owed to the correct figure is to send in a tax return.

While the taxman won’t accept your dog eating your paperwork as a valid excuse for filing late, they should be more understanding if you have a genuine excuse such as losing documents through fire/theft or a serious illness. More details here.

Interest on tax owed

If you haven’t paid the tax you owed on 31 January by 28 February then HMRC will levy a 5% surcharge, followed by a further 5% on 31 July on any tax still owed. This is on top of interest at 3% on any balance owed from 31 January.

Keeping records

You should keep all paperwork relating to your tax return, including proof of income and expenses, in case HMRC decides to take a closer look. Individuals and directors must keep these records for at least 1 year 10 months after the end of the tax year they relate to and the self-employed for at least 5 years 10 months. Failing to do so risks a £3,000 fine.

Are there simpler alternatives?

If you fall into the category of people required to complete a tax return (see rules above), then no. However, if you simply want to reclaim tax you’ve overpaid you may not need to do so via a tax return, see here for more details. For example, you reclaim excess tax paid on your savings using HMRC form R40.

Right, better get to work on my own return. If you have any tips or think of anything I’ve missed above please do leave a comment below. And, if you’ve still to complete your tax return, good luck!

You can read more about income tax in general on our income tax page.

Contract out of S2P/SERPS?

Question
My question is regarding the SERPS pension. I'm not sure whether i am contracted in or out, or which is best.

I am 56 years old and in full time employment and i do not pay into a pension scheme. How do i find out which is best for me? Hope you can help.

Answer
Let’s start with the basics. The State Earnings Related Pension Scheme (SERPS) and the State Second Pension (S2P), which replaced SERPs on 6 April 2002, are available only to employees and intended as a top-up to the basic state pension.

The amount of extra pension you receive is based on your national insurance contribution history and earnings over your working life. The formula varies between SERPS and S2P, but basically takes your earnings between lower and upper limits then increases them in-line with national average earnings until your retirement date before multiplying by certain factors and dividing by the number of years you’ve worked.

If you decide to contract out then the Government instead makes a payment into a personal or stakeholder pension of your choice, the amount being based on your age and earnings. Rather than cover all the rates here, you can find full details on our state pension page – click the ‘show more details about contracting out of S2P’ link.

The advantage of contracting out is that it protects you from any future changes the Government might make to the way S2P benefits are calculated. Past changes that reduced SERPs benefits highlight this risk. Once you have hard cash in a contracted out pension it’s more difficult for the Government to meddle with it.

However the downside, and it’s a potentially big one, is that the amount of contracted out pension income you receive in retirement will depend on investment performance. If your pension fund performs badly you could end up far worse off than you would have been under S2P. Future annuity rates will also affect how much pension you receive.

Trying to work out whether it’s better to contract in or out is a minefield, because no-one knows what changes the Government might make in future and investment performance is hard to predict. Most financial advisers have given up making S2P recommendations fearing they’ll get slapped with a mis-selling fine years down the line for not anticipating the unknown.

It’s a silly, over complicated system that could benefit from an overhaul and a massive dose of common sense.

Meanwhile, what should you do? Unless you belong to a final salary pension scheme where your employer might have automatically contracted you out (don’t worry if this is the case, they still have to provide benefits similar to S2P) then it sounds likely you’re contracted in. Given you’ve only got 9 years until you reach state pension age (65 - male), it probably makes sense to remain that way. I don’t think the risks of contracting out, in the hope of earning slightly more than you’d otherwise get, are worthwhile.

To find out where you stand I’d suggest requesting a state pension forecast, which includes SERPS and S2P. It’s free. You can find more details and apply here http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008.

Read this Q and A at http://www.candidmoney.com/questions/question112.aspx

Halifax Reward Current Account

Halifax has made a lot of noise about this current account, which pays you £5 every month if you pay in at least £1,000.

Overdraft interest has also been replaced by straightforward fixed charges: £1 a day for authorised overdrafts up to £2,500 and £2 a day for overdrafts above this. Unauthorised overdrafts are charged at £5 a day.

The account also offers a visa debit card and you can withdraw up to £300 a day from cash machines.

However, use the debit card to spend or withdraw cash overseas and you’ll face charges that are nothing short of daylight robbery. You’ll be charged 2.75% and £1.50 per transaction – spending the equivalent of £10 will cost you at least £11.77!

Overseas fees notwithstanding, Halifax does deserve a pat on the back for simplifying charges. But how does the Reward Current Account compare to those with more conventional interest and charging?

The £5 monthly payment is after basic rate tax has been deducted, so it’s worth £6.25 gross. If we assume an average £1,000 account balance the equivalent annual interest rate is 7.5% gross – very attractive versus the competition. On lower average balances the equivalent rate looks more appealing still, but the equivalent gross rate for a £5,000 average balance is just 1.5%, nothing to write home about.

Replacing overdraft interest with a fixed daily rate seems a neat idea, but it could leave you a lot worse off compared to a conventional current account if you stray into an authorised overdraft.

Assuming you receive the £5 monthly payments then the net the equivalent annual overdraft rate, in simple terms (because there’s no compounding with a flat daily fee), is shown below for various balances:

Overdraft
(authorised) Equivalent Annual Rate
(simple interest)
£100 305%
£1,000 30.5%
£2,500 12.2%
£3,000 22.3%
£5,000 13.4%

Given the majority of current accounts don’t charge fees for authorised overdrafts, just interest at around 10-20%, the Halifax Reward Current Account looks very poor value by comparison for both smaller overdraft balances and those just above £2,500.

The unauthorised overdraft charge of £5 a day looks steep, but is similar to that charged by most banks – a reminder to avoid unauthorised overdrafts wherever possible.

The overall appeal of this account really depends on your circumstances. If you’ll pay in at least £1,000 every month, have a low average balance, avoid overdrafts and rarely spend overseas then it’s a very good deal. For anyone else it’ll range between ok and downright awful, being worst value for those who consistently have a small authorised overdraft and/or spend money overseas.

Beware the probate rip-off

You don’t need to poll too many to conclude that the banks are probably the most hated of all UK organisations - thanks to a history of poor service and excessive charges.

And even when you’ve left this mortal coil, they don’t let go. In fact, some of their best tricks are kept for when you’re dead (and can do nothing about it!).

Take probate – that’s the legal process for sorting out a will and ensuring that all those named in it get their fair share. It’s a must if the estate is worth more than a nominal £5,000.

Banks and solicitors are usually keen to muscle in and handle probate, as it’s a very lucrative business. It’s not uncommon for some banks to charge 4% plus VAT, even on on simple to administer estates – potentially resulting in a five figure bill.

I recently came across the example of bank charging almost £50,000 in probate fees where a Swansea man had died leaving £1m in a savings account with that bank. It was a straightforward case of paying the inheritance tax and dividing what was left equally between six grandchildren. Had the deceased chosen a cheaper executor the fees may have been less than £5,000. Cheaper still, he could have chosen a trusted friend(s) or relative(s) capable of handling probate – effectively free.

If you ask a third party such as a bank or solicitor to write your will, give explicit instructions as to who will be the executor of your estate. Fail to do this and they’ll likely include themselves – opening the door for pocketing fat probate fees when you die. Few relatives are in the mood for haggling over a probate bill when a loved one has just passed away, making them easy prey for unscrupulous probate professionals - especially as it can be difficult to change executors after death.

So who should you name as the executor of your estate? The cheapest option would be a close relative or friend you can trust to complete the necessary tasks and paperwork – around 30% do this. On a straightforward estate this is likely to take around 20-30 hours of their time over a period of several months. If professional help is needed they can then shop around for a fair deal – at least your estate won’t be locked into using a potentially expensive probate firm from the outset.

The Probate Service is usually helpful and most people comfortable with forms and figures should be capable of handling the process. You can find information on the Probate Service website.

If you decide you’d rather appoint a probate professional as the executor of your will, then shop around to ensure a competitive fee. As you’ll find out, fees can vary enormously. Spotting a gap in the market, a firm called Final Duties recently launched a probate ‘broking’ service where, for a fee of £295, they’ll search the market for a competitive quote.

Final duties also offer the ability to ‘pre-pay’ your probate fees. What happens is that you set up the deal while you are still alive, pay for it – the cash goes into a special trust fund – and then you are assured that your last testament will be processed by a specialist solicitor.

At the same time, the pre-payment guarantees the price (unless the estate becomes substantially more complex) so there will be no inflationary or other increases – although you will obviously lose out on the interest or investment returns you could have otherwise earned on the money you hand over.

Unlike funeral costs, probate fees can’t be set off against what you leave to reduce any inheritance tax your estate might owe. Pre-paying probate fees overcomes this - the money leaves your estate while you’re still alive.

If you have already written a will then check who it names as the executor and amend, if necessary. Also don’t be afraid to ask appropriate family or friends whether they would consider being your executor. Fail to do either and you could end up hitting your loved ones with a significantly bigger bill than you need to.

TIP 1 - Make sure you have a valid will and that is rewritten as circumstances change.
TIP 2 - Married couples and those in civil partnerships may find it best to leave everything to each other to reduce inheritance tax.
TIP 3 - Make sure executors are not “professionals” such as banks, lawyers, will-writers or accountants. If you leave them in, you could be handing them an open cheque on your estate. Rewrite existing wills to exclude them –this can be done at any time before death.

Less than standard mortgage rates

Once upon a time Standard Variable Mortgage Rates (SVRs) were just that – pretty much the same across all lenders, give or take a percent. But the current difference between the highest and lowest SVRs is nearly 4%, not insignificant given the Bank of England Base Rate remains at 0.5%.

As a reminder, the SVR is a lender’s default mortgage rate which usually applies after a fixed rate or discount has come to an end on your mortgage. In the past it’s almost always been worth shopping around for a better deal the minute a SVR kicks in.

While that remains the case for many, in the current climate it’s not quite as straightforward. Some SVRs are very competitive, while others are shockingly high. And a few lenders have been increasing their SVRs despite Base Rate being stuck at 0.5% since March 2009.

If you have a mortgage and you’re paying the SVR then check the rate with your lender (it should be on their website). The table below shows some of the highest and lowest SVRs.

Lowest SVRs Highest SVRs
Lender SVR Lender SVR
Cheltenham & Gloucester 2.50% Chesham BS 6.45%
Cheshire BS 2.50% Nottingham BS 5.99%
Derbyshire BS 2.50% Accord 5.99%
Lloyds TSB 2.50% Newcastle BS 5.99%
Nationwide BS* 2.50%* Stroud & Swindon BS 5.99%

Source: Moneyfacts 6/01/10. * Note: only applies to mortgages taken out on or before 29/4/09

If you’re fortunate enough to be on a 2.5% SVR then chances are you’re best off staying put, as this is very competitive versus other mortgages on the market at present. But you might find yourself paying rather more than this, for example a whopping 6.45% if your mortgage is with Chesham Building society.

Don’t underestimate how much extra an over the top rate could cost you. On a £100,000 repayment mortgage over 10 years interest would total £13,124 at 2.5% soaring to £35,952 at 6.45% - over £20,000 difference!

If you’re on an uncompetitive SVR and your mortgage is 30-40% less than the value of your home then you should be able to re-mortgage at a more attractive rate, potentially saving you a small fortune. Of course, you need to factor in any costs of moving such as any exit penalties on your existing mortgage and fees on the new one, as well as valuation and legal costs. You can then work out how long it’ll take you to break even and decide whether switching mortgage is worthwhile.

A quick trawl on the Internet, including price comparison sites like www.moneyfacts.co.uk and moneysupermarket.co.uk, should reveal the current ‘best buys’. And if doing it yourself seems like too much work, then use a fee-free independent mortgage broker. You’ll rarely pay any more than by going direct; the broker will usually receive around 0.35% of the mortgage value as a fee from the lender to pay for their time.

Giving needn't be taxing

Keep track of how much you give to good causes via the government’s tax-saving Gift Aid scheme. If you’re a top rate taxpayer, you can either boost your generosity or – and this is admittedly not a charitable thought – get some money back and keep it for yourself.


According to HMRC higher rate taxpayers reclaimed £280 million in tax relief on donations during the 2008/09 tax year, either for their own benefit or the charity's. However, it's thought that up to half of top rate taxpayers don't reclaim the additional 20% personal tax relief via their tax return. Good news for the taxman, but a lost opportunity for taxpayers and charities.

This is because Gift Aid, which promises full tax relief on donations, assumes all donors pay basic 20% tax only. Those on the top 40% rate can reclaim the extra tax they pay but they have to do it on the return – it’s not automatic unless they make charitable donations via their PAYE salary slip using Give As You Earn schemes.

So, for example, suppose you donate £100 using Gift Aid. The charity can reclaim £25 of basic rate tax and a further £3 from the Government (until 5 April 2011 to compensate for the basic rate tax rate falling from 22% to 20%) making a total donation of £128. If you're a higher rate taxpayer you can reclaim £25 via your tax return, either for yourself or as a charitable donation.

Note, you must have paid at least as much tax as is being reclaimed - this could include tax on savings and capital gains tax as well as income. If it suits, you can backdate Gift Aid donations to the previous tax year.

TAX TIP 1 – Couples where one pays top rate tax and the other basic rate should ensure that all donations come from the partner with the higher rate.

TAX TIP 2 - Never give to a charity without completing a Gift Aid form - charities that take cash usually allow for this on envelopes but putting coins in a collecting box is not tax efficient.