Dread or delight?
The forgotten benefits of Self Assessments
If you’ve started 2019 with a sense of foreboding, then chances are your Self Assessment tax return is due at the end of the month. While it is true that Self Assessment can be a daunting prospect, it is also a brilliant opportunity to claim back money, by maximising your available reliefs and exemptions. With only two days to go until the 31st January deadline, we take a look at the main area of relief where people are missing out: pensions.
In total, almost 12 million taxpayers are expected to complete a 2017/18 Self Assessment tax return by the end of January: these include self-employed sole traders, limited company directors, shareholders and LLP partners. But many of us are guilty of leaving it to the last minute – according to HRMC, last year 2.6 million people had still not filed their return by 29th January.
It is perhaps no surprise that Self Assessment is a task faced with such apprehension: it involves careful planning – from registering online to unearthing those illusive bank statements, not to mention the threat of a fine for late/incorrect submissions. It can therefore be easy to overlook the benefits of Self Assessment – we forget that it provides you with the opportunity to claim money that is rightfully yours, by maximising reliefs and exemptions.
One such exemption is that associated with pension contributions. We automatically receive basic rate Income Tax relief, worth 20%, on our pension contributions. This means, for example, that an £80 contribution is automatically topped up to £100. For basic rate taxpayers, no further action is necessary. But higher and additional rate taxpayers are entitled to an extra 20% and 25% tax relief respectively.
Ian Price, Divisional Director at St. James’s Place, says: “The idea of filling out a tax return can be daunting, but it’s important that pension savers appreciate the sums they’re potentially missing out on if they fail to claim the money they are owed. Unfortunately, leaving Self Assessment until the last minute means that people are more likely to miss important details and make costly mistakes.”
Research suggests up to a fifth of middle and higher earners do not claim the extra relief owed to them. This means that hundreds of thousands of people who earn more than £46,350 a year (£43,430 in Scotland) are missing out on a significant tax-saving opportunity (source: True Potential, December 2016).
The good news is that if you have failed to claim the extra relief previously, you can still claim for the previous three tax years. That said, the deadline for 2015/16 tax year is fast approaching – it’s too late for paper forms but the deadline for online forms is midnight on 31 January. It is worth noting that not all schemes operate tax relief in the same way. Some pensions take your contribution from your pay before any tax is deducted. This means you get any basic, higher and additional rate tax relief immediately and don’t need to claim any extra relief in your Self Assessment for those contributions. Many workplace pension schemes operate this way, but it’s worth checking with your employer if you are in any doubt.
Beyond pension relief
It’s not just pensions where people are missing out on potential tax relief – you’re allowed to offset some of your Self Assessment tax bills by claiming a range of business expenses on your annual Income Tax Return. According to tax return software provider GoSimpleTax, the most common expenses not claimed for by self-employed people include fuel, phone costs, car servicing, car insurance and the use of their homes as an office. Those who forget to claim fuel expenses miss out on an average of £600 a year and savings of £120 on their tax bill. You can also claim for things like office supplies, marketing costs, mortgage, council tax and utility bills, specialist clothing and staff costs, to name a few.
Preparation is key
If your Self Assessment tax return has become a task you approach with trepidation then it’s worth remembering the benefits it can bring. It’s also a brilliant way of getting your finances in order for the year ahead. If you need help, there are HMRC guidance notes and manuals online – and don’t forget that you can also contact your Wellesley adviser for guidance.