Definition
Self-assessment is a system that allows taxpayers to calculate and report their own tax liabilities for both income tax and capital gains tax for the year. Major changes to the UK system occurred in the year 1996-97, which resulted in the self-assessment section being included as part of the overall tax return. This section encompasses reporting of taxable income, chargeable gains, and claims for personal allowances.
The self-assessment process is voluntary. Should the taxpayer prefer that HM Revenue and Customs (HMRC) calculate their tax liability, the tax return must be submitted by September 30 following the end of the year of assessment, as opposed to the usual deadline of January 31. The introduction of self-assessment was also marked by HMRC being granted extensive audit powers to review any tax return.
Examples
Example 1: Individual Income Tax Self-Assessment
John is a self-employed graphic designer. At the end of the financial year, John needs to complete his self-assessment tax return. He includes all of his earnings, deducts allowable expenses such as office supplies and software subscriptions, and calculates his taxable income. John then computes his tax liability and submits his self-assessment to HMRC online.
Example 2: Capital Gains Tax Self-Assessment
Sarah sells a second property she owned, which results in a capital gain. She is required to report this gain via her self-assessment tax return. Sarah calculates the gain from the sale after deducting permissible costs like legal fees and the initial purchase cost of the property. She then calculates the applicable capital gains tax and includes this in her tax return submission.
Frequently Asked Questions (FAQs)
Q1: Who needs to file a self-assessment tax return?
A1: Self-assessment tax returns are required for individuals who are self-employed, company directors, have rental income, receive foreign income, or have capital gains, among other situations.
Q2: What is the deadline for submitting a self-assessment tax return online?
A2: The deadline for submitting an online self-assessment tax return is January 31 following the tax year.
Q3: Can I submit a paper self-assessment tax return?
A3: Yes, paper self-assessment tax returns can be submitted, but they must be received by HMRC by October 31 following the end of the tax year.
Q4: What happens if I miss the self-assessment tax return deadline?
A4: Missing the tax return deadline can result in penalties, starting with an initial £100 fixed penalty, even if there is no tax to pay. Penalties increase the longer the delay persists.
Q5: Can HMRC audit my self-assessment tax return?
A5: Yes, HMRC has extensive audit powers to review and inquire into any self-assessment tax return submitted.
Related Terms with Definitions
- Income Tax: A tax levied by the government on the income earned by individuals and businesses.
- Capital Gains Tax: A tax on the profit realized from the sale of a non-inventory asset.
- Taxable Income: The portion of an individual’s or a company’s income used to determine how much tax is owed to the government.
- Chargeable Gains: The gains subject to capital gains tax, usually after allowing for certain exemptions, reliefs, and allowable losses.
- Personal Allowances: An amount of income that an individual can earn before being liable to pay income tax.
Online Resources
Suggested Books for Further Studies
- Taxation: Finance Act 2020 by Melville
- Tolley’s Tax Guide 2021-22 by Claire Hayes and Ruth Newman
- Taxation: Policy and Practice 2020/21 by Andrew Lymer and David Oats
Accounting Basics: “Self-Assessment” Fundamentals Quiz
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