Self Assessment – What is it?
Self assessment means assessing yourself on behalf of the inland revenue by completing an annual tax return.
The return – a collection of your total income, allowances and expenditure for the year – helps the inland revenue work out how much tax is due or (perhaps overpaid) through your tax code.
Income includes ALL payments made and due to you in the year you are preparing a return for.
Expenditure includes all payments IN THE COURSE OF YOUR BUSINESS that you paid or owed others in the year you are preparing a return for.
Allowances are the amounts that the law says can be deducted from your net income before tax calculations are made. A good example will be your annual Personal Allowance.
So what constitutes Income? Income includes:
– Total invoices you issued in the tax year regardless of when or if you received the payments
– Credit interest
– Rent received
– Capital gains (profit on the sale of certain assets)
– Any other income already taxed at source such as salaries/wages.
What constitutes Expenditure? Expenditure must have been incurred wholly for the purpose of generating taxable income. Examples are:
– Cost of goods and/or services provided
– Transport expenses
– Rent paid for commercial property
NOTE that most employees do not need to complete self assessments because their tax affairs are fairly straightforward and already taken care of by their employers via PAYE (Pay As You Earn).
SO who needs to complete a self-assessment?
– Employees who have complicated tax affairs such as those who are freelancers on the side.
– Employees who earn £100,000 or more per year
– Self Employed Persons, including those in Partnerships
– Company Directors
– Those receiving foreign income.