Every year the chore of the self-assessment tax return descends upon many of us and human nature prevails; leaving things to the last minute.
However, the challenge of 2020 and the threat this has posed on individuals finances has led many to take stock of their financial affairs. Not only in wanting to pinpoint where they can cut costs but also to have a better understanding of their finances in general.
In light of this new mindset many of us are in, we may see the self-assessment tax return with renewed value; a chance to properly understand what tax is due, why and any planning that could improve our position for future tax years.
What are the benefits of completing your tax return earlier?
- If you are employed and the wrong tax code has been used
Where the tax code was too high you may have overpaid tax, the sooner your tax return is submitted the sooner you will receive your repayment.
If tax has been underpaid, then submitting your tax return online before the end of December means you can elect for the underpayment to be collected from your future tax code, provided it is below £3,000.
- If you make payments on account, they could be reduced
You may be self-employed or a landlord and required to make payments in advance, based on the previous year’s tax liability. When preparing your 2019/20 tax return, if your 2020/21 profits will be lower, you can look to reduce your payments on account.
- More time to plan to pay your tax
By submitting your tax returns as soon as possible, you have more time to prepare for the tax liability due. In the event that you may struggle to pay all or part of any tax liability due, you will be in a better position to explore the possibility of a deferment or repayment schedule with the Revenue.
- More time to consider if you are claiming available reliefs and allowances
A more thorough approach can ensure you claim the tax relief and allowances that you are entitled to, for example:
o Gift aid donations
o Pension contributions
o Expenses such as working from home
o Transferring the marriage allowance
- More time to consider planning your income tax efficiency for the following tax year
When preparing your tax return, most of the opportunities to improve your position have passed and that is why it is vital to consider the tax year you are in whilst you can make changes, for example:
o If you are married or in a civil partnership, is your income evenly assessed across the two of you or does one of you fall into the higher rates of tax and the other does not?
o Could you benefit from Child Benefit if your income has reduced?
- Using this annual task as a time to consider your affairs on a longer-term basis
As you set aside time for this annual task, you could also use it as an opportunity to ensure you are planning for the long term too, considering things such as:
o Is my pension pot going to be sufficient for when I come to retire?
o What about my wealth in general, is it time to consider Inheritance Tax?
With the turbulent year we have faced, some individuals may be considering putting off their 2019/20 tax returns until after the deadline, accepting the initial £100 penalty. However, in view of the number of benefits from which individuals can improve their position by earlier preparation, we would always encourage individuals to invest the time in preparing their tax returns without delay.