For lots of people in the UK tax and national insurance isn’t a subject they pay a lot of attention to. This is because for a number of income sources such as employment income and pension income tax is normally deducted as source by the issuer. The recipient of the income doesn’t necessarily need to involve themselves with the calculation or declaration of those taxes other than when they want to check the amounts deducted. There are however many sources of income where tax is not deducted at source and in this case the recipient of the income may need to register for self assessment in order to declare and pay any liability. In this article we will look at when an individual may need to register for self assessment by breaking down the requirements of each income source where tax in not usually deducted at source as well as looking at other reasons to register for self assessment.
Who Needs To Complete A Self Assessment?
You may need to register for self assessment and complete a tax return if you are in receipt of untaxed income in a given tax year and in some situations like UK bank interest even when tax has already been deducted at source . The most common reasons that HMRC identify are listed below. We will then look in more detail at each reason later in the article:
- You were trading as a self employed individual
- You were a partner in a partnership
- You receive rental income
- You receive tips and commissions
- You have income from savings, investments and dividends
- You have foreign income
- You receive child benefit and you or your partner earn over £50,000
Self-Employed Income
If you are running a business on a self employed basis then you may need to complete a self assessment. Even if you’re just selling goods or services on a casual basis you may well be classed as a trader which means you are technically self employed. HMRC will only ask that you complete the self-employed section of a tax return where your total self employed turnover exceed £1,000 in a tax year. If HMRC identify your activity as a hobby rather than actually trading then they will not request that you submit a self assessment. Sometimes even where your self employed business is operating at a loss you may want to report those losses to HMRC so that they can be utilised against future profits. This can be done via the self assessment.
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If you are a partner in a partnership then you will need to register for self assessment. The partnership itself will also need to be registered and submit a partnership return although it will not be liable to pay any tax. Each partner will need to declare their share of the partnerships profits on their own individual self assessment.
Rental Income
Where you generate an income from renting property that is not your home, whether you need to register for self assessment or not will depend on how much income you are generating and how much profit you are making. Currently the he first £1,000 of rental income is covered by a rental allowance and if your income in a given tax year is lower than this then you will not need to declare it to HMRC. If your rental income is between £1,000 – £2,500 then you can inform HMRC by contacting them by phone or post but you will need to register for self assessment if either of the following apply:
- Income from property rental is between £2,500 – £9,999 after allowable expenses
- Income from property rental is more than £10,000 before allowable expenses
Tips And Commissions
Although HMRC list tips and commissions as a potential trigger to register for self assessment, their guidance is generally vague as to specific situations where you would be required to register. Commissions are usually calculated and paid directly by the employer who would calculate and deduct tax and national insurance where required. The general rule with tips is that where your employer is in control of how tips are distributed they will also be responsible for tax and national insurance reporting but where you receive tips and payments directly from the customer it will be your responsibility. Even where you are responsible for reporting and paying tax you still might not need to register for self assessment. In this scenario you can contact HMRC by phone or post to inform them of the additional income. In most cases they will simply adjust your tax code so that the additional tax is collected via PAYE but where this is not possible or practical they could ask you to complete a self assessment return.
Savings, Investments & Dividend Income
There are numerous tax free allowances for individuals who save and invest. With bank interest, dividends and capital gains all falling into this category. Some of these income sources such as UK bank interest tends to have some tax deducted at source despite individuals receiving a savings allowance which means you may actually be entitled to reclaim some tax if you have overpaid which is done by completing a self assessment or form R40 with HMRC. Where your savings and investment income exceeds £!0,000 in a tax year there is a requirement to register for self assessment even if you believe the amount is covered by tax free allowances.
Foreign Income
Foreign income is any income that wasn’t sourced from England, Scotland, Wales or Northern Ireland. The Channel Islands and the Isle Of Man are considered foreign for tax purposes. Whether you will actually pay tax or not will depend on your residency status. If you are a considered resident in the UK then you will need to pay tax on foreign income but if you are not considered resident then you will not need to pay tax. Where you think tax may be due you will usually need to register for self assessment to report the income but some foreign income is taxed differently. Foreign income can become a complex area for tax as income can end up being taxed twice in some circumstances. Luckily many countries have some form of double taxation agreement with the UK which helps to prevent this but it’s important to seek professional advice where needed.
Some common examples of foreign income are:
- Wages if you work abroad
- Foreign investment income, for example dividends and savings interest
- Rental income on overseas property
- Income from pensions held overseas
Child Benefit Tax Charge
Where you, your partner or a contributing third party (someone who receives child benefits and contributes at least an equal amount towards the child’s upkeep but the child is living with you) is in receipt of child benefit and you have income over £50,000 you may need to register for self assessment and pay a high income child benefit tax charge. If your income is over £50,000 but your partners is higher then it will be their responsibility to register for self assessment and pay the charge but where your income is over £50,000 and the highest of the two incomes then the responsibility is yours.
If you are liable to pay this charge you will need to register for self assessment by 5th October following the end of the tax year.
Other Reasons To Register For Self Assessment
Some individuals may want to register for self assessment for reasons other than declaring income. There are a number of allowances and claims that can be made via the self assessment return such as applying married couples allowance or claiming employment related expenses. Some individuals will also register for self assessment so that they have a proof of income which is often required for third party applications.
There is nothing stopping someone registering for self assessment even where there is no tax to pay however when an individual commits to submitting a return they also run the risk of incurring penalties should they miss a deadline or report information incorrectly. For this reason we would always recommend speaking to an accountant or contacting HMRC directly before registering for self assessment to see if there are other options available to you.
HMRC also have a handy self assessment tool that allows you to check if you need to submit a tax return.
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Adam Hill
Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."
