Income Tax Self Assessment

Introduction

The Inland Revenue operates the self-assessment system in the UK for individuals (and companies). Self-assessment is broadly the process by which taxpayers declare taxable income and gains on tax returns, calculate their income tax, capital gains tax and Class 4 National Insurance contributions as appropriate (although the Inland Revenue can calculate these liabilities instead) and pay their liabilities by certain dates. Many taxpayers (e.g. employees and pensioners) who pay their tax through the PAYE system on earned income, pensions and/or by deduction of tax at source on investment income do not normally require a tax return, and are therefore not within the self-assessment system. However, taxpayers who are self-employed, and those who receive their income gross, those who are higher rate taxpayers on their investment income and those who have capital gains tax liabilities, are generally liable to file tax returns and pay all or part of their tax directly to the Inland Revenue through self-assessment.

Here is a '1 Minute Guide' to self-assessment for individuals. This guide only provides a very brief, basic outline of the self-assessment system. Specific professional advice should always be taken in appropriate circumstances.

10 Key Points

1. Notifying the Inland Revenue
   
   Taxpayers who do not receive a tax return and have taxable profits or gains on which no tax has been paid should normally notify the Inland Revenue by 5 October in the following tax year. Failure to do so may result in penalties, based on the amount of tax unpaid at the normal payment date. However, notification is generally not required for employment income or pensions wholly dealt with under PAYE or investment income taxed at source, if the individual is not a higher rate taxpayer and there are no chargeable gains to report.
2. What is the filing date for tax returns?
   
   The Inland Revenue normally issues tax returns shortly after the 5 April tax year end. The normal filing date for returns is 31 January following the end of the relevant tax year. However, if the Inland Revenue did not issue the tax return until after 31 October following the end of the tax year, the filing date is 3 months from the date of issue. For taxpayers who wish the Revenue to calculate their tax in time to make payment by the due date, their tax return should be submitted by 30 September following the end of the tax year (or within 2 months after the return is issued, if later). The Inland Revenue will still calculate the tax upon request if this deadline is missed, but cannot guarantee notifying the taxpayer of the amount payable by the due date. For taxpayers who wish the Inland Revenue to collect a tax underpayment of up to £2,000 in a later tax year through their PAYE tax code, the filing deadline is also 30 September following the tax year (or within 2 months after the return is issued, if later), or 30 December following the tax year if the tax return is filed online.
3. When does tax become payable under self-assessment?
   
   Taxpayers are generally required to make two equal payments on account of their income tax liabilities (and Class 4 National Insurance, if appropriate) by 31 January in the tax year and 31 July following the end of the tax year, based on their income tax (and Class 4 National Insurance) liability of the previous year. Any balance (including capital gains tax, for which no payments on account are required) is normally payable by 31 January following the end of the relevant tax year. However, if a notice to file a tax return was not issued until after 31 October following the tax year, the balancing payment is due within 3 months from the date of the notice.
4. Payments on account
   
   Taxpayers are not required to make payments on account of their income tax (and Class 4 National Insurance) liability if more than 80% of the previous year's liability was covered by PAYE, tax deducted at source and dividend tax credits, or if the previous year's tax (and Class 4 National Insurance) liability was less than £500. Taxpayers required to make payments on account who believe that the liability for that year will be less than the liability for the previous year may make a claim to reduce or eliminate payments on account by 31 January following the end of the tax year. The claim may be made on Inland Revenue form SA303, or on the tax return itself, or by letter, giving the reasons for the claim. Interest is charged if payments on account prove too low following the claim, and penalties may be charged for fraudulent or negligent claims.
5. Surcharges
   
   In addition to interest charges for late payment from the due date, if the balancing payment of tax (and Class 4 National Insurance contributions) for a tax year remains unpaid 28 days following the due date (normally 28 February), a surcharge can be imposed. The surcharge is 5% of the unpaid amount. If the tax is still unpaid after 6 months following the due date, a further 5% surcharge can be imposed. Surcharges are due for payment within 30 days from the date on which they are imposed, and attract interest charges for late payment. However, surcharges are subject to appeal in appropriate cases, and are not imposed in certain circumstances, e.g. if there is a reasonable excuse for late payment of the tax, or if a penalty has been incurred on the same tax liability.
6. Penalties
   
   Penalties apply for filing tax returns late. For example, an automatic penalty of £100 is charged if the return is not filed by 31 January following the tax year (or within 3 months after a notice to file the return, if later). A further £100 penalty is charged (unless a daily penalty is imposed) if the return is not filed by the following 31 July (or within 6 months from the filing date, if later). However, these fixed penalties cannot exceed the amount of tax outstanding at the tax return filing date, and may not be incurred at all if the taxpayer had a 'reasonable excuse' for the delay in submitting the return. Daily penalties of up to £60 per day may be imposed in more serious cases. In cases of continued failure, i.e. the return is not filed by the following 31 January (or within 12 months following the filing date, if later) a tax-related penalty may be imposed up to an amount equal to the tax otherwise payable under the return. There are other penalties under self-assessment as well (e.g. failure to notify chargeability to tax and failing to keep proper records).
7. What is the time limit for correcting tax returns?
   
   The Inland Revenue may correct obvious errors in a tax return, within 9 months of receiving it, subject to a right by the taxpayer to reject the correction within 30 days. A taxpayer may also amend a tax return (e.g. to correct errors or replace estimated figures), by notifying the Revenue within 12 months from the filing date. However, the Revenue may still charge a penalty if the original return was made fraudulently or negligently.
8. What is the time limit for an Inland Revenue enquiry into a tax return?
   
   The Inland Revenue may enquire into an individual's tax return (or any amendment) up to 12 months from the filing date. If the return (or amendment) is submitted after its filing date, the time limit for an enquiry is 12 months from the date the return is filed, plus the period to the next 'quarter day'. The quarter days are 31 January, 30 April, 31 July and 31 October. The Revenue may select tax returns at random for enquiry, although most returns will be selected for a reason (the Revenue is not required to state whether an enquiry is random or if the return has been selected deliberately).
9. 'Discovery' and 'Determination'
   
   'Discovery' - The tax return can normally be regarded as final once the enquiry time limit has passed, in which case the calculation of tax will normally stand. However, the Inland Revenue may make a discovery assessment to make good a loss of tax due to the taxpayer's fraudulent or negligent conduct, or if the Revenue could not reasonably be expected to identify the loss of tax from the information made available. The normal time limit for assessments is 5 years from 31 January following the end of the tax year. However, the time limit for making a discovery assessment involving fraud or neglect is 20 years after 31 January following the end of the tax year.
   
   'Determination' - If a tax return has not been submitted the Revenue may make a determination of the tax liability, within 5 years following the filing date for the return. The determination is treated as a self-assessment, but it can be replaced by an actual self-assessment within the same limit, or within 12 months after the determination, if later.
10. Record keeping
    
    Individuals (as well as trustees and partners) are required to keep all records relevant to the tax return, for 22 months following the end of the tax year, except that the self-employed (i.e. sole traders and partners) and those who let property must keep records for 5 years and 10 months following the end of the tax year. However, if the Inland Revenue commence an enquiry into the tax return, the records must be kept until completion of the enquiry, if later. If a claim is made other than in the tax return, any records supporting that claim must be kept until any Revenue enquiry into the claim (or amendment) is complete, or until the Revenue can no longer begin an enquiry. A penalty of up to £3,000 can be imposed for any tax year in which there is a failure to keep the necessary records, although in practice penalties are only sought in more serious and/or persistent cases of record keeping failure.

Disclaimer

The content of these guides is based on tax legislation in operation at the time of publication, which may subsequently have changed. Whilst every care has been taken in its production, no responsibility can be accepted for any action undertaken or refrained from as a consequence of this material. This information is for general guidance only. Specific professional advice should always be obtained based on personal circumstances. TaxationWeb Limited accepts no responsibility whatsoever for any action undertaken or refrained from as a result of the information contained herein.

Article Added Tuesday, 01 February 2005

Your attention is drawn to the disclaimer on this site, which applies to the content in this section.