How to do a tax return

There’s no doubt that many sole traders, small business owners, and freelancers dread doing their self-assessment tax return. Getting registered for VAT is a one-off step – after that, the annual trudge through your tax return form is with you evermore!

The deadline (31 January for online returns) is circled in stark red pen on calendars up and down the UK, with a survey by QuickBooks finding that one in 10 sole traders would rather go unpaid for a week than complete their tax return – while 20% of female sole traders would rather give birth!

But, with a bit of planning and our top tips, tax time doesn’t have to be terrifying – in fact, if you stay on top of your records and can easily access your figures, you can file everything online in 10-15 minutes, then get on with running your business.

This guide will explain how the process works, breaking down the following:

Why do I have to file a tax return?

So, taxes.

Let’s start with the obvious – the government needs money to, well, run the country.

The way it gets most of that money is through taxes, with people and businesses paying every week/month/year to ensure that the police are paid, the bins are collected, the roads are maintained, and so on.

If you’re employed, the way this happens is pretty straightforward – business enrol in PAYE (Pay As You Earn), and the money is taken out of your salary every month. All this is handled electronically, and the government knows exactly who is paying what.

If you’re a sole trader, freelancer, or other small business owner though, things are a bit different. There’s a good chance you won’t have employees, so you won’t enrol in PAYE – meaning the government won’t know how much you’re earning, and how much tax you should be paying.

To sort this out, you need to file a self-assessment tax return.

At its simplest, this states how much you made in a tax year (which runs from 6 April in one year to 5 April in the following year), and how much you spent on business expenses in that period.

You take the expenses away from what you made and this gives your profit/loss, which then dictates how much tax you pay.

We’ll dive into the specifics of how that all works in this guide, but that’s the basic idea – the government needs to know your finances so it knows how much tax you should be paying, and this is the easiest way of finding out.

Once upon a time, this was done on paper, but now the vast majority of self-assessment tax returns are filed online.

Tip: you can kickstart your tax return with our top tips video.

Who has to file a tax return?

One common question among small business owners is “how much can I make before I have to file a tax return?”

Luckily, the answer to this one is simple – £1,000.

As soon as your revenue (i.e. the amount your business earned in a tax year) is over £1,000, you need to fill in and submit a self-assessment tax return.

There are also other reasons you might need to file a tax return, such as if you make money from renting out property, or earn income from investments. The full list is given on the gov.uk self-assessment tax return page.

Most self-assessment tax returns, though, are filed by small businesses that are either operating as sole traders or partnerships.

How do I register as self-employed?

Most people registering as self-employed won’t have been self-employed before, so we’ll discuss that process first, and then address the exceptions.

If you can’t register online, then you can fill in this form on screen, print it off, and post it to HMRC.

How do I prepare my tax return?

A (slightly cleaned up) maxim of the British army claims that “Proper Preparation Prevents Poor Performance.”

It’s a pretty good rule for life, and DEFINITELY applies to your self-assessment tax return.

As Pauline Green, Head of Product Compliance at Intuit Quickbooks, puts it:

“The best thing you can do when it comes to Self-Assessment tax returns is to plan ahead. Recording the information you need for your tax returns throughout the year makes preparing for the deadline in January much more manageable. It’s easy to bury your head in the sand and leave tax returns to the last minute, but this will only cause unnecessary stress.”

For more guidance on how to deal with the mental stress of your tax return, check out QuickBooks 10 step guide to a mindful tax return, which is full of handy tips on how to overcome the fear and dread many people associate with tax returns.

And this is the central point – your tax situation shouldn’t be something you only think about at the end of January.

Throughout the year, you need to make sure that you’re recording details of your income and expenses – in other words, the money coming in and going out of your business. This information is absolutely key to your tax return, so make sure you keep organised records.

As we’ll discuss in more detail later, accounting software can really, really help you stay organised – but, even if you don’t go down this route, keeping digital records is a great idea. You can simply have a spreadsheet that lists the key figures for your business, and snap photos of receipts with your smartphone.

This planning might not be possible for your first tax return, but even then, make sure you at least start preparing a few months before the January 31 deadline – some of the information you need might be up to 21 months old, and requesting bank statements etc. might take time, so make sure you’re not caught out.

Staying on top of your figures will make it much easier to avoid these late filing fines.

Just as importantly, it will also mean you know how much you need to save each month to be able to pay your tax bill.

For more info on this, we spoke to Daniel Edwards, co-founder of D&K Accounting.

Daniel started D&K in August 2016 after he and his partner each took out a £25,000 loan from government-backed small business specialist Start Up Loans UK, and has since built it into a thriving business. He knows a thing or two about accounting, and the realities of running a small business.

To run D&K, he uses what’s called the Profit First methodology. Here’s how it works:

• You take 5% of your turnover (the money made by your business) and put it into a profit pot
• 6% is set aside for taxes
• 40% is your wages
• The remaining 49% is for expenses (all the money that your business needs to spend)
• Every 3 months, you can then pay 50% of the profit pot to yourself as a bonus, and set the other 50% aside as a “rainy day fund” in case there are unforeseen events (like a global pandemic!) and your sales dry up.

As part of this approach, if you don’t have the money to pay for an expense, then you either shop around for a better deal, or simply wait until you’ve made enough sales to cover it.

Not every business will be able to operate in this way, but you should have some sort of method in place that ensures you regularly set aside money for tax payments, and that you’re not spending more each month than your business is making.

Daniel’s other top tip is to open a business bank account, in order to separate your personal and business expenses. For more info on how to do this and the pros and cons of different business bank accounts, check out our business bank accounts guide, and our analysis of the best challenger business bank accounts.

And, speaking of paying your tax, this is a good time to mention a nasty, complicated thing called payments on account. If you don’t know about this, it can have a major impact on your business finances.

What expenses can I claim for?

Claiming the right expenses is absolutely vital – if you don’t claim everything that you’re entitled to, you’ll end up paying more tax than you have to. However, if you claim too much, then HMRC might get suspicious and investigate your claim.

The golden rule is this:

Every expense you claim for has to be for business use

Here’s how accounting expert Lucy Cohen, co-founder of online accountants Mazuma Money, puts it:

“You can only claim expenses for the business costs, not for anything personal. Travel costs, machinery, equipment like computers and other IT accessories are included. You can even claim for marketing and advertising costs. But don’t push the envelope and risk getting caught out.

I always tell clients to use the ‘wholly and exclusively’ test. Was the expense you’re about to claim wholly and exclusively used for the purpose of your business, or would you have spent it anyway, even if you weren’t self-employed?”

For any expense that’s split between business and personal use (such as the running costs for a car that’s used to get to meetings and do the school run), you’ll need to work out what share of the use is business, and then claim for that. If it’s 50:50 for example, then you can claim half of those costs as a business expense.

Working from home expenses

As Tommy’s Tax personal tax specialist Jonathan Myers points out, if you run your small business from home, then you’re entitled to tax relief.

“If you’re in a sole trader or partnership, you can claim up to £10 a month if you work 10 hours or more from home in that month.

“If you work 101 hours or more from home in that month, then you can claim up to £26 a month.”

The other option is to provide actual figures that detail the extra costs incurred for your business:

“Of course, you can get a more precise claim from HMRC if you can support it with actual, measurable figures. But it can be difficult, and hard to do this precisely. If you really want to get an exact number for a precise claim but are struggling to do so, then a reputable tax expert company will be able to help you do this. And in most cases, they only take a small fee if they can structure your claim to help you win even more money back from HMRC.”

How do I file my online self-assessment tax return?

https://youtu.be/jdHBPiWNnyA

Once you’ve got all the information together, the actual filing process is actually pretty straightforward.

Before we dive in, let’s tackle a common question.

And we’ve finally got there – it’s filing time.

We’ll briefly run down the different sections of your online self-assessment tax return below, but if you want to know exactly what’s in store, then check out these simple video walkthroughs from Small Business Toolbox and Trader UK.

Getting started

As you’ve probably guessed, first you’ll need to sign in.

Head to the self-assessment sign-in page and enter your Government Gateway User ID and password (you’ll have got these when you registered as self-employed).

Then click the option to complete your self-assessment tax return.

Scroll down and click ‘Start Now’.

About you

A nice and easy start – just fill in the boxes with your personal details, including your full name, Unique Taxpayer Reference (UTR) number, date of birth, student loan status, and so on.

IMPORTANT – Throughout your tax return, different questions will have blue question marks next to them. These open help sections with more information on those questions, so if you don’t understand any of them, make sure you use these.

If you still don’t understand, then you probably need the help of an accountant.

Once you’ve done that, click ‘Save and continue’.

Tailor your return

Again, this section is pretty simple – it’s just a lot of box ticking.

Page 1

Click the box that says you’re providing honest and accurate information (in other words, telling the truth) and scroll down, confirming things like your annual self-employment income was over £1,000, how many self-employed businesses you have, the name of your self-employed business, and whether you received any foreign income.

One important point here: you should include all income, even if it’s taxed at source (such as income from a regular PAYE job).

Once you’ve completed all the boxes, click ‘Save and continue’.

Page 2

Yep, more boxes to tick.

This page is about whether you received interest, dividends, pensions, or other benefits in the tax year, so just scroll down and click yes or no as appropriate.

Click ‘Save and continue’ to move on.

Page 3

You guessed it – more tick boxes.

Most of this is pretty self-explanatory, with only one that might need a bit more consideration. This asks whether you want to transfer 10% of your personal allowance to your spouse or civil partner.

The gov.uk marriage allowance page has more information on how this works, and how it could help you as a couple to pay less tax overall.

Once you’ve ticked all the boxes, hit ‘Save and continue’.

Fill in your return

You’ll now see a page that shows all the sections you’ve completed (which have ticks before them) and all the sections you still need to complete (which have plusses before them).

Clicking on any of the sections will take you to that section, or you can just scroll down to the bottom and click ‘Next’.

Self-employment details

Page 1

This first page is dead easy. There’s just one question – whether your annual turnover (i.e. total sales in the tax year) was more than £85,000.

If it was, then you probably need to register for VAT. For loads more info on how this works, check out the gov.uk page on VAT registration.

Most people though will simply click ‘no’, and then ‘Save and continue’.

You’re then presented with a load of boxes that ask about various unusual tax situations. For most tax returns, none of these will apply, and if you think any of them might be applicable to you, it’s definitely worth getting proper advice from an accountant.

Otherwise, click the final box that says ‘None of these apply’ and hit ‘Save and continue’.

Page 2

The first thing you’ll need to do now is enter a description of your business.

The limit is just 42 characters, so they’re not looking for an essay – just a few words that say what your business does.

Then you’ll need to confirm whether your name, description, address, or business postcode has changed in the last 12 months, and enter the start date for your business.

The last question on this page concerns businesses that have ceased trading so again, that won’t apply to most returns.

You know the drill by now – fill in the details and hit ‘Save and continue’.

Page 3

There’s only two questions on this page, but they’re both very important.

First up, you need to enter the date that your accounts are made up to. If you’re using the standard tax year, then this date will be the final day of the previous tax year – at the time of writing (July 2021), this would be 5 April 2021. If you’re using a different period, though, make sure you enter this accurately.

Secondly, you need to state whether you’re using cash basis accounting. If you don’t know what this is, then check out the box below.

If you’re unsure which is the better choice for your business, make sure you get advice from an accountant.

Page 4

Now we’re really getting into the weeds.

On this page, you’ll enter the total income for your business in the relevant tax year, broken down into turnover (which covers sales, fees, and the vast majority of money earned by your business), any other business income, and the trading income allowance.

Next, we move onto expenses, which you can either enter as a single total value or as a detailed breakdown.

To keep things simple, we’ll assume you’re entering a single value, so just click that box and then enter the total value of your expenses for that tax year.

As soon as you’ve done this, the onscreen display of your net profit should change accordingly.

IMPORTANT – Ok, this is a basic point, but it’s caught people out before. Be very, very careful with your zeros when entering figures into your tax return – there’s a world of difference between a £3,000 expense claim and a £30,000 expense claim.

If you do make a genuine mistake, it’s not the end of the world. After you’ve filed your return, you have until the filing deadline of the following year to make any changes. So, if you submit your tax return on 31 January 2022, you have until 31 January 2023 to make any changes to your figures.

However, your tax bill may change as a result, and it’s obviously much better to just get things right first time round.

Page 5

As we’ve entered details of our income and expenses on the previous page, we can skip this page.

(It’s all about capital allowances, and is more relevant for people using accrual accounting.)

Page 6

For most returns, this page can also be skipped as it concerns goods or services for your own use, losses brought forward, and any other business income.

Page 7

Another page you can skip, unless you want to take tax advantage of having made a loss in the current tax year.

Page 8

Unless you’re a construction industry subcontractor, then you don’t need to worry about this page either.

If you do fall into that camp, then you’ll want to read up on the Construction Industry Scheme (CIS). 

Page 9

This page asks you whether you’re exempt from paying Class 4 National Insurance Contributions (NICs).

As the page explains, you are exempt if you were at or over the State Pension age at the start of the tax year, you were under 16 at the start of the tax year, or you weren’t resident in the UK for tax purposes during the tax year.

Other more unusual exemptions include being a diver or diving supervisor, but “only in some cases”.

If you think you might be exempt, make sure you check the guidance and consult an accountant if you need further support.

However, this is unlikely to apply to the majority of tax returns, so most people will just click ‘No’ and move on.

Page 10

Phew, really close now – an “any other information” page.

Unless there’s anything HMRC really needs to know that hasn’t been covered already, just ignore this and hit ‘Save and continue’.

Page 11 – Summary

And there we are, a nice summary page showing everything you’ve entered in that section.

If you spot any problems, you can go back and edit. Otherwise, just scroll down and click ‘Save and continue’.

Page 12 – Class 2 National Insurance Contributions (NICs)

This page tells you – based on the figures you’ve entered – how much Class 2 National Insurance contributions you have to pay.

It also discusses how to pay Class 2 NICs voluntarily (to ensure you can get a full state pension when you retire) if your profits were below the £6,025 threshold.

There’s more information on the gov.uk Voluntary National Insurance page, and if you do want to do this, there’s a box that needs to be ticked at the bottom of the page.

Otherwise, just click ‘No’ and then our old friend ‘Save and continue’.

Page 13 – Underpaid tax 1/2

This page shows the underpaid tax for this tax year. You simply need to check that the figure is correct.

For most returns, this figure will be £0.00, so it should be a pretty easy check.

Once you’ve done this, click ‘Yes’, then ‘Save and Continue’.

Page 14 – Underpaid tax 2/2

Same drill here – check the figure, click the box, move on.

Page 15 – Other debts

Another page that will only apply to a minority of tax returns.

Unless you do have other debts that haven’t been entered yet, type ‘0’ in the box and move on.

Page 16 – Overpaid tax

This page asks you to select who will receive the tax refund if your return shows you’ve paid too much tax.

Most people will want to receive the money themselves, so click ‘Yourself’ and then ‘Save and continue’.

Page 17 – Overpaid tax bank account details

There’s a lot of text on this page, but all you need to do is enter the details of your bank or building society.

So, fill in your bank name, account holder name, sort code, and account number, then click ‘Save and continue’.

Page 18 – If you have not paid enough tax

This is another page dealing with a complicated and specialised minority of tax returns.

Unless you’re really sure that it applies to you, ignore it and click ‘Save and continue’.

Page 19 – Adjustments

Like the previous page, unless you’re sure this applies to you, ignore it and hit ‘Save and continue’.

Page 20 – Provisional/Estimated figures

In the vast majority of cases, the figures you’ve entered should be real figures that can be backed up if necessary.

So, unless you know you have included provisional figures (in which case you’ll need to explain why you’ve done this on the next page), click ‘No’ and move on.

Page 21 – Any other information

Oh joy, another ‘any other information’ page.

Again, unless there’s anything HMRC really needs to know that hasn’t been covered in the previous 20 pages, leave it blank.

You can also add an attachment to your return here, but this also won’t be needed for most returns.

So, click ‘No’ and then hit ‘Save and continue’.

How can I make doing my tax return easier?

There are two big ways you can make doing your tax return easier – get a good accountant and use accounting software.

Get a good accountant

If the thought of profit and loss accounts, expenses claims, and sales graphs fills you with dread, then you need to hire a good accountant.

They’ll give you specialist tax advice, be able to advise you on exactly what you can and can’t claim as an expense, and help you work out tricky issues like whether you should use cash basis or accrual accounting.

Obviously, this all comes at a cost, but a good accountant will save you countless hours of stress, and can often pay for themselves through tax savings.

To get started, check out the startups.co.uk guide to ‘How to choose an accountant’. This features some of the key things to look for in an accountant, such as expertise in your sector, experience dealing with SMEs, and a personal connection that suggests they’ll be easy to work with.

Use accounting software

Whether you’re working with an accountant or going it alone, accounting software will make running your business a whole lot easier. The days of entering figures into spreadsheets are long gone – these all singing, all dancing business solutions can handle everything from integrating with your bank account to effortlessly track the money coming in and out of your business, to creating invoices, quotes, and even interactive reports that make it easy to see how your business is getting on.

All this means that sorting out your self-assessment tax return is a doddle – with just a few clicks, you can easily access your total income and expenses for the tax year. The most comprehensive packages even integrate with HMRC, meaning you don’t even need to leave the software to submit your tax return, and most of the work is done for you.

They also run in the cloud, meaning that whether you’re on the PC in the office, or your mobile/tablet on the go, you’ll always have access to your business finances.

The table below gives a quick overview of some of the most popular accounting software packages for small businesses. Or, for loads more info, check out our guide to the ‘Best self-employed accounting software’ and find the right choice for your business.

Final thoughts

No one who runs a small business enjoys the self-assessment process, and that’s never going to change. It’s a process of box ticking that culminates in you having to pay the government some of your profits.

However, the key to making sure that filling in the online form and paying what you owe is a minor January inconvenience – rather than an unbearably stressful month of rooting around for receipts and sales figures – is making sure you keep records and plan for tax time throughout the year.

As this guide has shown, the actual form is fairly straightforward – most self-employed people and small business owners will just have to enter their total figures for income and expenses. You still need to make sure you keep accurate records in case HMRC decides to take a closer look at your accounts, but completing a self-assessment tax return doesn’t mean having to enter details of every pen bought or energy bill paid.

If you know your figures and have kept decent records, then the actual filing process shouldn’t take more than 10-15 minutes for straightforward tax returns.

Meeting that 31 January deadline is crucial – if your tax return is just a day late, you’ll be hit with a £100 fine. So, make sure you circle it in red pen on your calendar, set alerts on your phone, or do whatever you have to do to ensure you don’t forget. Or, just do it early – your tax return can be filed any time after the end of the previous tax year, so any lull in your business is a great opportunity to get it out the way.

And, as we’ve covered, there are two ways to make handling your business finances much easier. Using accounting software will make keeping track of your incomings and outgoings a breeze, and getting the help of a professional accountant will make sure you’re taking advantage of all the tax reliefs and expenses available to you.

And finally, if you’re having any trouble paying your tax bill, make sure you contact HMRC as soon as possible. You should be able to set up a payment plan, allowing you to pay a bit each month instead of all in one go.

Good luck!