Self assessment – how it works
Let’s explain by way of an example:
Sarah started to let a property in September 2022 for £15,000 with allowable expenses of £3,000 per annum. She has other income which uses her personal allowance and basic rate tax band, so the income will all be taxed at the higher rate (currently 40%). She has not had to complete a self-assessment tax return in the past.
What are her responsibilities?
Before 5th October 2023
She must inform HMRC that she has a source of untaxed income within six months of the end of the relevant tax year. As Sarah’s rental income profits are first received in the tax year ending on 5th April 2023 she must notify no later than 5th October 2023. HMRC have produced form SA1 to enable taxpayers to notify that they have a liability which can be found on the Government website.
Before 31st October 2023 (optional)
If she wants to complete a paper tax return and/or HMRC to calculate her tax liability, the paper 2022/23 tax return must be filed by 31st October 2023. There is a £100 penalty if the paper return is filed after this date.
Before 30th December 2023 (optional)
If Sarah’s liability is less than £3,000 and she wants the liability to be included in her PAYE code for 2024/25 (see below), she must either have filed a paper return by 31st October 2023 or filed an electronic return before 30th December 2023.
Before 31st January 2024
If she has not filed a paper tax return by 31st October 2023, she must file a tax return electronically by 31st January 2024 or she will be liable to a penalty of £100. (See “What if you are late?” below). There are certain individuals (e.g. politically sensitive individuals) who are not allowed to file electronically so they may have to file a paper return by this date instead.
What are Sarah’s tax liabilities?
Assuming that the income carries on at the same rate until at least 5th April 2024, her liabilities will be:
Tax Year Tax due
2022/23 £2,800 (Profits to 05/04/23 7,000 @ 40%)
2023/24 £4,800 (Annual Profits of 12,000 @ 40%)
When is her tax due?
Is Sarah employed?
If Sarah is employed, she will be paying income tax under Pay As You Earn (PAYE). HMRC do try to include estimates for rental income in PAYE codes which means that the tax can be collected up to two years earlier than necessary. We, therefore, advise that you do not ask HMRC to have an estimate included in your code.
Sarah’s tax liability for 2022/23 will be £2,800 and provided her 2023 self-assessment tax return is filed before 30th December 2023, this liability can be included in her code for 2024/25 as it is less than £3,000. This means that the liability would be collected in instalments in the year ended 5th April 2025 rather than the year ended 5th April 2023 if HMRC had included an estimate of the income in the 2022/23 PAYE code.
If the self-assessment liability for any tax year is more than £3,000, it cannot be included in the PAYE code. So Sarah would not be able to have her liability for 2023/24 of £4,800 included in her code for 2025/26. Therefore, she would have a liability of £7,200 to pay on 31st January 2025 in the same year as the £2,800 for 2022/23 was being collected through her code (see below). It is therefore important that cash is kept to one side for any liabilities.
If Sarah is not employed or she has a liability of more than £3,000:
If the net liability is less than £1,000 or 20% of the total tax and Class 4 national insurance before any tax deducted is taken into account, then the liabilities are due on 31st January following the end of the tax year and there are no payments on account. So Sarah would have to pay £2,800 on 31st January 2024 and £4,800 on 31st January 2025 if she met the 20% criteria.
If neither condition is met, payments on account are due for the following tax year of half of the previous year’s income tax and Class 4 NIC liability on 31st January in the following tax year and another half six months later on 31st July. If the liability of the following year increases then the balance is due on the following 31st January and the payments on account increase for the next year. If the liability for the following year decreases, then there would be a repayment of the difference and the payments on account reduce for the next year. A claim can be made to reduce the payments on account if a reduction in the liability is expected, for instance, if the rental income had ceased. If the payments are reduced by too much, there is an interest charge on the overclaim. In the first year in which payments on account are due, there is effectively a payment of one and a half years tax at once. This is best shown using Sarah’s liabilities as an illustration:
|Date Due||Tax Year||Tax Liability
(2022/23 in PAYE Code)
|2022/23 Total Liability||2,800||–|
|2023/24 1st POA (1/2 x 2,800)||1,400||–|
|31st January 2024||4,200||–|
|2023/24 2nd POA (1/2 x 2,800)||1,400||–|
|31st July 2024||1,400||–|
|2023/24 balance (4800 – (2 x 1400)||2,000||4,800|
|2024/25 1st POA (1/2 x 4,800)||2,400||2,400|
|31st January 2025||4,400||7.200|
|2024/25 2nd POA (1/2 x 4,800)||2,400||2,400|
|31st July 2025||2,400||2,400|
If Sarah’s income and tax liability were to stay the same then her payments would remain at £2,400 on 31st January and 31st July each year thereafter because the payments on account would match the liability. This is unlikely in practice, but if the income levels are similar each year, the payments in January and July are likely to be similar after the first three years.
What if you are late?
There is an automatic non-refundable penalty of £100 if the return is not filed by the due date (usually 31st January following the end of the tax year). If there is a reasonable excuse, the penalties will be waived. If the return is more than three months overdue, there is a penalty of £10 for each further day that the return is late up to a maximum of 90 days. If the return is more than six months late there will be a further penalty of £300 or 5% of the liability if this is higher. If the return is filed more than twelve months after the filing deadline (i.e. 31st January 22 months after the end of the tax year) there will be a further penalty of £300 or 5% of the liability if this is higher in addition to the penalty due for the previous 31st July. In serious cases, the penalty may be up to 100% of the tax due. If you do not pay on time, interest runs on any amount paid late. There is also a 5% penalty if the liability for the previous tax year is not paid by 30 days after 31st January. Following that tax year, a further 5% penalty if it is not paid by the 31st July after that and if the tax is not paid by the following 31st January then there will be a third 5% penalty.
The penalties are costly and it is vital that all taxpayers ensure that their returns are filed on time.
What you do if you cannot pay?
Try to make an arrangement with HMRC. There is currently a Business Payment Support Service Helpline their contact number is 0300 200 3835.
Records you need to keep and Making Tax Digital
At present, you are required to keep records which accurately record your income and expenses. From 6th April 2026 those with a gross rental income in excess of £50,000 will need to keep records digitally and report their income and expenses every quarter to HMRC within one month of the end of the appropriate quarter. From April 2027 those with a gross rental income over £30,000 will need to do the same. HMRC have stated that there would be no change to the half yearly payment dates even though the reports are being made quarterly.
Capital Gains Tax (CGT)
UK Residents: For most UK residential properties, you are required to make a return and pay any capital gains tax due within 60 days of completion of the sale. It may be necessary to estimate the rate of capital gains tax which can be adjusted either in the self assessment return or by amending the capital gains tax return. Any non-residential disposals are only declared on your self assessment Income Tax return.
Non UK Residents: You are required to make a return and pay any capital gains tax due within 60 days of completion of the sale for the sale of any UK property whether it is residential or commercial. It may be necessary to estimate the rate of capital gains tax which can be adjusted either in the self assessment return or by amending the capital gains tax return.
If the return is not made within 60 days of completion of the sale there are late filing penalties.
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a UKLandlordtax.co.uk, S S Thandi and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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