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How Do I Calculate My Tax Return?

Andre Spiteri
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Does the thought of sitting down to calculate your tax return make you go all weak and wobbly? Well, it doesn’t have to. Calculating your tax return can seem like a dark and mysterious art. But, if you understand the basics, it’s actually quite straightforward.

How to calculate tax return: Understanding your status

First things first, calculating your tax return is different depending on whether you’re employed or self-employed.

If you’re employed, your employer will deduct tax automatically from your salary each month. Yet, you may still have to file a tax return if you have other income, for example, if you freelance part-time or rent out a property.

Of course, if you’re self-employed, you can’t avoid calculating your taxes and filing a return. Which brings us to the next point.

What’s your tax liability?

You don’t pay taxes on all your self employed income, but only on your profits. This means you can deduct:

The UK government taxes employees and self-employed sole traders at the same rates. Part of your profits, called the personal allowance, is tax free. You’re taxed on the rest at progressively higher rates.

The tax bands are slightly different if you live in Scotland. Here, the 41% bracket starts at £43,431 instead of £50,001.

What if I’m a limited liability company?

If you do business as a limited liability company, calculating your taxes is slightly different. Your company is a separate entity and you’re its employee. So, you’ll have to calculate two sets of taxes:

  • Your company’s taxes: This is called corporation tax. The current rate is 19% of the company’s profits.
  • Your own taxes: Your taxes are deducted from your salary each month. However, since you’re also the company, you’re the one who’ll need to make the calculation and actually deduct tax through HMRC’s PAYE system.

The usual rates apply to your salary. However, any dividends over £5,000 are taxed differently.

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Calculating your tax return: National Insurance

National Insurance forms part of your tax bill. So, you’ll need to take it into account.

HMRC works this out automatically, which means you don’t have to calculate it yourself. However, it’s good to have an idea of how much you’ll owe. That way you can plan better.

Employees (including self-employed people who trade as a limited liability company) pay Class 1 National Insurance. This is:

  • 12% if you earn between £157 and £866 a week
  • 2% if you earn more than £866 a week

Self-employed sole traders pay Class 2 and Class 4 National Insurance. Class 2 National Insurance is £2.95 a week.

5 tax return tips

Knowing how to calculate your tax return is half the battle. Then, you have to actually file it.

Here are five tips to make this process as stress-free as possible:

1. Check your status

HMRC will fine you for not filing a tax return, even if you didn’t know you had to. So better safe than sorry. Checking your tax status online takes less than five minutes.

2. Register for an online account

HMRC’s filing deadline is 31 October. But that’s only if you file a paper return. If you file online the deadline is 31 January, which buys you an extra 3 months.

To register, simply set up a Government Gateway account. It’s best to do this well in advance since you’ll need to wait for an activation code in the post.

3. Keep accurate records

Tracking incomings and outgoings keep everything organised. This makes it easier to complete your tax return. The trick is to make sure you’re recording everything as accurately as possible. Tools such as MileIQ can do this for you automatically.

4. Speak to an accountant

There’s no reason why you shouldn’t be able to complete your tax return yourself. However, it’s still worth speaking to an accountant to make sure you’re doing it right.

Making mistakes on your tax return can result in a more expensive tax bill or a hefty fine. An accountant can help you avoid pitfalls and advise you on ways you can reduce your bill.

5. Budget ahead

By setting aside some money each month, you’ll spread the cost of your tax bill and make it more manageable.

Of course, you’ll only know exactly how much tax you owe at the end of the financial year. Luckily, HMRC has a self assessment tool to help you budget. For best results, keep this money in a separate account. That way, you’ll feel less tempted to dip into it.

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