How to file a tax return

Christmas is over and we are almost a week into the new year. Nothing kills the festive mood more quickly than tax, but as the 31 January tax return deadline approaches, it is time to act. A good way to start is by brushing up on what is involved. I.e. How do you file a tax return and who is required to complete one?

You might think tax returns are only for the self-employed and ultra-high earners, however more people than ever will need to complete a self-assessment tax return this year. Fiscal drag is largely to blame, thanks to frozen tax thresholds. The dividend and capital gains tax allowances have also been slashed twice since 2022.

Thousands of retirees may also owe income tax on their pension for the first time thanks to generous increases to the state pension in recent years. Meanwhile, savers who have benefitted from higher interest rates could fall victim to the savings tax trap if they aren’t vigilant.

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Who needs to file a tax return?

A common reason for falling foul of the taxman is simply not knowing that tax was due.

If your only source of income is your salary and you are not self-employed, then you probably don’t need to file a tax return (unless you are a very high earner). Your income tax will be deducted from your salary before you receive it through a process called “pay as you earn” (PAYE). Your employer will look after this on your behalf.

However, if you also earn income from savings, investments, a business, a second home, or another source, then it is likely that you will need to file a self-assessment tax return. The same is true if you are self-employed. We take a closer look at the rules.

Business owners and the self-employed

If you run your own business and work for yourself, you will need to file a tax return. This becomes a requirement once you earn more than £1,000 (before taking off anything you can claim tax relief on). You will also need to complete a tax return if you are a partner in a business.

Tax on savings

Most people can earn a certain amount of interest on their savings without having to pay any tax at all. However, with some providers offering savings rates of around 5%, you might be surprised at how quickly you can exceed this threshold.

A basic-rate taxpayer with a 5% savings account could become liable for a tax bill once their savings pot hits £20,000, if the money is held outside of an ISA.

If you are a basic-rate taxpayer, then you are entitled to earn up to £1,000 in tax-free interest. This is called the personal savings allowance. This falls to £500 for higher-rate taxpayers, while additional-rate taxpayers aren’t entitled to any personal savings allowance at all.

You can use your personal allowance to earn interest tax-free if you haven’t already used it up on your wages, pension, or other income.

There is an additional allowance of up to £5,000 if you are a low earner, also known as the starting rate for savings. You will only be entitled to the full amount if you earn less than £12,570, but will still qualify for some of it up to £17,570.

Once you exceed these thresholds, you will need to file a tax return.

Tax on investments

Most investments are subject to income and capital gains tax if they are held outside an ISA. The capital gains and dividend allowances for the 2023/24 tax year were £6,000 and £1,000 respectively, however they have been slashed to £3,000 and £500 going forward.

If you exceeded the thresholds for the 2023/24 tax year, you will need to complete a tax return. It is worth remembering that capital gains tax is paid on investments once they have been sold. You are able to deduct any losses to help lower your capital gains tax bill.

Tax on second homes

If you own a property that you rent out to tenants, then you will be liable for tax. The rules vary depending on whether you own the property personally, or run a property business.

If you own the property personally, the first £1,000 of rental income is tax-free. Otherwise, the following rules apply:

• If you earn between £1,000 and £2,500 a year, you need to contact HMRC.
• If you earn more than £2,500 after allowable expenses, or more than £10,000 before allowable expenses, you need to complete a tax return. Allowable expenses include things like letting agents’ fees, maintenance and repair costs, ground rent, and gardening fees.

Rental income is taxed at the same rate you pay on other forms of income, such as your salary. You will need to declare this on a tax return form.

If you have multiple properties and run them as a buy-to-let company, there are different rules. The rental income should be counted in the same way as any other business income. You can offset some costs to reduce your tax bill, but different rules apply depending on whether it is a residential property, a furnished holiday let, or a commercial property. Further information can be found on the government website.

Tax rules for high earners

If your annual income is over £150,000, you will need to complete a self-assessment tax return form before the deadline this year – even if all of your income comes from your PAYE salary.

However, this is changing going forward. In his 2023 Autumn Statement, former chancellor Jeremy Hunt confirmed that this rule would be abolished from the 2024/25 tax year, simplifying the tax return process “for up to 338,000 taxpayers”.

Remember, although we are in the 2024/25 tax year currently, your tax return is retrospective, meaning it covers the 2023/24 tax year.

Parents who pay the child benefit charge

If you receive child benefit but aren’t eligible for the full amount, then you need to return the excess by completing a tax return form.

Child benefit payments are means-tested, and are only paid to families where the highest-earning parent earns less than a certain threshold. Hunt raised this threshold from £50,000 to £60,000 in the Spring Budget on 6 March. However, this kicked in on 6 April 2024, so it won’t impact your upcoming tax return, which covers the 2023/2024 tax year.

As a result, if you have received child benefit but your salary (or your partner’s salary) exceeds £50,000 (individually, not jointly), you need to complete a tax return form.

Other untaxed income

HMRC points out that you may also need to complete a tax return if you received any other untaxed income, such as tips and commission or foreign income. If you are still not sure whether you need to complete a tax return, you can use HMRC’s online tool to help.

Does the taxman owe you money?

Sometimes, it is in your best interest to file a tax return – even if you don’t owe HMRC money. For example, if you are a higher or additional-rate taxpayer making contributions to your workplace pension scheme, HMRC could actually owe you money in the form of pension tax relief.

All savers get the 20% basic-rate tax back automatically. However, if you are a higher or additional-rate taxpayer, you may need to claim the rest back yourself, depending on the type of pension scheme. You can do this by filling out a self-assessment tax return form.

Likewise, if you have started drawing from your pension pot and HMRC isn’t applying the correct tax code on your pension income (this is very common), then you can complete a tax return to claim a refund. Alternatively, you can avoid this overpayment in the first place by providing an up-to-date tax code or P45 to your pension provider before making your first withdrawal.

How to file a tax return: step-by-step guide

1. Register with HMRC

If you haven’t filed a tax return before, the first thing you need to do is register with HMRC. You will also need to do this if you registered with HMRC in previous years, but didn’t complete a tax return last year.

The registration deadline was 5 October 2024, and has already passed. If you missed it, you can still avoid a fine as long as you submit and pay any tax by the 31 January deadline. However, HMRC says it is crucial that taxpayers register as soon as possible.

Once you have registered, you will receive your Unique Taxpayer Reference number. This can take up to 10 working days to receive by post, but you can usually see it sooner through the HMRC app or via your online HMRC account.

2. Complete the form

This year’s paper tax return deadline has already passed (31 October), so anyone who still needs to file their return should do so online.

The tax return form asks for some personal information such as your name, address, date of birth, National Insurance number, 10-digit Unique Taxpayer Reference number, and your employer reference code (if you have one).

You should also collect any relevant documents and have them to hand when filling out the form. These could include your P60, bank statements, student loan statements, and any investment account statements.

The tax return form is divided into several sections which ask you to detail:

• Any income you received (e.g. through interest, dividends or your pension)
• Tax reliefs
• Student loan repayments
• Any money you owe as a result of the child benefit charge
• Any marriage allowance you would like to transfer to your spouse or civil partner

Depending on your circumstances, you may need to complete some separate supplementary pages. For example, you will need to do this if you are self-employed.

3. Submit your completed tax return

Once you have completed the form, submit your tax return. You will then receive a tax bill showing how much money you owe. If you submit your tax return online, this information will be generated instantly.

4. Pay your tax bill

Once you have submitted your tax return, make sure to pay your tax bill by the 31 January deadline. You can pay online via the government website, or through the HMRC app. If you miss the deadline, you will start to accrue interest at a high rate (7.25%).

“If you’re having difficulty paying, you might be able to agree a payment plan online with HMRC as long as you owe £30,000 or less,” says Charlene Young, pensions and savings expert at Hargreaves Lansdown. Further details can be found on the government website.

When thinking ahead to next year, consider filing your tax return early. One of the benefits is that this allows you to set up a budget payment plan to make weekly or monthly direct debit payments towards your bill.

What are “payments on account”?

Some people have to pay through a system known as “payments on account”. This applies to you if the amount of tax you owed last year was £1,000 or more, or if you didn’t pay at least 80% through your tax code.

Through this system, you pay your tax bill in advance in two instalments. The instalments you pay are just estimates, based on how much tax you paid in the previous year.

If you pay through this system, you should already have paid the majority of your tax bill for the 2023/24 tax year. The first instalment would have been paid by 31 January 2024, and the second by 31 July 2024.

As these figures are just estimates, it is possible that there will still be a balance for you to pay once you have submitted your tax return form. Alternatively, HMRC may owe you money.

If you have underpaid, you will need to make a “balancing payment” by midnight on 31 January 2025. If you have overpaid, you can claim a tax refund through the government website.