29 Dec 2022

Understanding your tax liability to effectively plan ahead

The vast majority of the population are now filing their tax returns online, however there are still a small number of people for whom paper returns will still apply. This includes those who fall under an online filing exemption, which cover those who cannot get online due to location or other reasons such as age or due to religious beliefs.

When filing a paper return it is important to work out which sections of the form you need to complete and ensure that you sign the page TR8 confirming the figures. It is advisable to keep a copy of the return and send to HMRC by recorded delivery.

By filing a paper tax return, HMRC will work out the tax on your behalf unless you specifically send a tax calculation summary page. If HMRC calculate the figures for you then please do check to ensure that it is as you expect and don’t forget to include any Capital Gains from the sale of assets.

One advantage of getting your tax return in to HMRC early is having the option to pay small tax liabilities with adjustments to your tax code for the future year.

You can also change a tax code at any point to adjust for untaxed income, so that you pay the amount due over the year, via any income taxed at source. For example, if you have rental profits of £5000 then by reducing your tax-free allowance by £5000 with HMRC, this will take the tax from any taxed income throughout the year, rather than paying a lumpsum thus making the payments more manageable.

Speaking to HMRC to create payment plans for taxes due is vital, so that if you are having trouble paying you don’t fall behind on taxes due and incur additional amounts in fines and interest. HMRC have options to apply for payment plans online and to even pause payments if needed.

Understanding your tax liability is crucial
No matter what your tax return process might be, the key to managing taxes due is having a full understanding of your liability. This allows you to plan ahead and avoid extra stress when deadlines come around.

When we speak to small business owners, for instance, who are facing personal tax liabilities on top of rising energy and rental costs, it is our job to walk those clients through all of the available options and help them to speak to the HMRC who may be able to make the process more manageable.

The delayed impact of the pandemic
Among those who should be paying particularly close attention to their tax returns this year are the sole traders who received the fourth and fifth Self-Employment Income Support Scheme (SEISS) grant. The fourth grant covered February, March and April but as it was received in April, it is fully taxed in the 2022 tax return.

This means that if a Self Employed person wasn’t working during last tax year (2021) and was in receipt of the SEISS grants, they effectively only had a 10-month tax liability and will now face in the 2022 return a heavier 14-month tax liability due to the extra two months.

Whilst these individuals were aware that they would be taxed on these grants, when you are in survival mode in the middle of a crisis, the future tax implications may not have been a primary concern.

This can be further complicated and compounded when looking at people’s ‘Payments on account' – advance payments towards your tax bill. SEISS grants only provided 80% of your three months’ average of trading profits, which meant that last year's tax return profits tended to be lower. Add to this that only 10 months’ worth of tax was due and people's ‘Payments on Account’ may have been reduced significantly.

As a result, we are entering a perfect storm; 14 months of tax liability combined with ‘Payments on Account’ being less, all meaning that the amount due in January will be much bigger than clients would normally be seeing or expecting.

Unfortunately, the flip-flopping of the government’s tax policies isn’t helping with the sense of uncertainty among business owners either. But by understanding your tax liabilities now, and planning around them, you will be in the best possible position for mitigating their impact. Plus, having this knowledge in your arsenal, even if it isn’t all rosy, will likely give you an encouraging sense of control during this challenging time.

The most important thing to remember is that no matter your situation, there are always solutions available, and the more time you can give yourself, the more chance you will have to pursue one of these options.

Don’t bury your head in the sand and hope it goes away, reach out for support from the team at Monahans. We are happy to help.

Clare Bowen