During the second world war, the government put the rate of Income Tax up to pay for the ever-increasing cost of the war in Europe. This meant that more people than ever before were paying tax.
Consequently, in 1944, the government introduced the “Pay as You Earn” (PAYE) system to collect taxes more efficiently.
Today, we still use PAYE and if you’re employed, your Income Tax and National Insurance (NI) are automatically deducted from your wages and paid to HMRC.
Yet, if you’re self-employed, it’s up to you to fill out a self-assessment form to calculate what tax you owe and make the payments on time.
However, self-employment isn’t the only reason to file for self-assessment. Even if you’re employed and you pay Income Tax and NI through PAYE, you may still need to file an assessment with HMRC. In some cases, this could even benefit you.
Read on to learn why you might need to file for self-assessment if you’re not self-employed.
If you earn more than £150,000 you need to file a tax return
Normally, if you’re employed, you pay tax through PAYE and don’t necessarily need to file a tax return. However, if your adjusted net income – your total taxable income excluding your pension contributions – is more than £150,000, you are obliged to file a tax return.
This is true even if you don’t owe any additional tax and none of your income is from self-employment.
Yet, if you earn less than £150,000, there are several reasons why you might still want to fill out a return.
You could claim additional tax relief on your pension contributions
If you’re a higher- or additional-rate taxpayer and you don’t send a return to HMRC, you could be missing out on valuable tax relief on your pension contributions.
This is because, in the 2024/25 financial year, you normally receive 20% tax relief on your contributions automatically. Higher- and additional-rate taxpayers are entitled to an extra 20% or 25% tax relief on top of this.
However, you must claim the additional tax relief through self-assessment and if you don’t, you could be missing out on a significant amount of wealth – which you could divert back to your pension savings.
Fortunately, we can help you determine how much tax relief you’re entitled to and ensure that you’re claiming it all. If you decide to invest all the tax relief you claim into your pension, it could help you to reach your savings goals and fund your dream lifestyle in retirement.
You may need to declare income from savings and investments
Saving and investing may allow you to build wealth for the future, so you can achieve your goals and fund your desired lifestyle.
When creating your financial plan, we will help you explore tax-efficient saving and investing options, such as ISAs. However, depending on your situation, you might still pay some tax, and this could mean that you need to file a return.
For instance, you may pay tax on interest from non-ISA savings that exceed your “Personal Savings Allowance” (PSA).
In 2024/25, the PSA is:
- £1,000 if you’re a basic-rate taxpayer
- £500 if you’re a higher-rate taxpayer
- £0 if you’re an additional-rate taxpayer.
You will pay tax on your cash savings interest at your marginal rate of Income Tax.
Additionally, if you hold dividend-paying investments outside an ISA, you may pay tax on the income you earn from them.
In 2024/25, you have a “Dividend Allowance” of £500. You could pay tax on any income that exceeds this threshold, and the amount you pay depends on your marginal rate of Income Tax.
You could pay:
- 8.75% if you’re a basic-rate taxpayer
- 33.75 if you’re a higher-rate taxpayer
- 39.35% if you’re an additional-rate taxpayer.
If you’ve already used your full ISA allowance and continue saving and investing elsewhere, you may pay some tax.
As such, you might need to file a tax return to inform HMRC of your income and calculate what you owe.
Additionally, if you invest in property and rent it out, you might need to declare this income through self-assessment.
You might need to calculate Capital Gains Tax when selling assets
When you make a profit from selling certain qualifying assets, you might need to pay Capital Gains Tax (CGT).
For example, you may pay CGT when selling:
- Stocks and shares outside of an ISA
- A residential property that isn’t your main home
- Certain business assets
- Personal possessions worth more than £6,000 (excluding your car).
In 2024/25, you can earn up to £3,000 without paying CGT. This is your “Annual Exempt Amount”. Any profits that exceed your Annual Exempt Amount may be liable for tax at a rate of:
- 10% if you’re a basic-rate taxpayer (18% for a residential property)
- 20% if you’re a higher- or additional-rate taxpayer (24% for a residential property).
If you are liable for CGT, you will have to file a tax return to declare the gains to HMRC and calculate what you owe.
We can explore ways to potentially mitigate CGT such as purchasing stocks and shares in an ISA and using your Annual Exempt Amount strategically.
Additionally, if you make a loss from selling or disposing of an asset, you may be able to offset this amount against capital gains in the same tax year and reduce the CGT you pay.
If your losses exceed your profits, you can carry the remaining loss forward and offset it against future capital gains. You can also claim losses from the previous four years.
As such, it may benefit you to file a return and claim any unused capital losses, even if you have no capital gains to report in the current tax year.
We can help you determine what CGT you might be liable to pay, and whether you could potentially mitigate your bill.
It’s important that you understand the tax treatment of your pensions, savings, and investments and when you need to file a tax return because any mistakes could be costly.
Get in touch
We can help you explore tax-efficient saving and investment options to potentially mitigate a large tax bill.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority (FCA) does not regulate tax planning.
Approved by the Openwork Partnership on 13/09/2024
Production
