As the old saying goes, there are two things guaranteed in life: death and taxes. Whilst we’re not going to delve into the former, the latter is something which many people get confused with. Taxes are a mandatory financial charge imposed on an individual taxpayer or company by a governmental entity, which in turn funds government spending and various public expenditures.
In the UK, taxes are a basic process of life, whether you’re employed or self-employed, yet with so many different taxes and regulations around it, it can be very easy to make a mistake which could result in a fine or even affect your state benefits. We go through the most common tax return blunders and explain what the consequences are for getting the respective tax wrong. Here are the top mistakes that many people make:
Registering For Self-Employment But Not Registering For The Relevant Class NIC
If you’re self-employed, a sole trader or member of a partnership your National Insurance (NI) contributions are slightly different, and this will need to be declared on your annual self-assessment form. When you register for self-employment, whilst class 4 NI is automatically paid through, your tax return to HMRC will not automatically register you for Class 2 NI. Both must be paid in order to get a full year worth on contributions, each class is only paid once you have net profits above the below amounts.
- Class 2 if your profits are £6,515 or more a year
- Class 4 if your profits are £9,569 or more a year
By registering for self-employment or Class 2 NI, it will not automatically register for the other so both will need to be completed to be fully compliant with HMRC.
By not doing this, it can then lead to you not having a full years’ worth of NI Contributions for that year. As a result, this will likely impact your entitlement to any state aid should you require it, as well as your state pension when you come to receive it.
Failure To Declare Change Of Tax Code
Whilst HMRC will send notices to your employer to change your tax code, should it have changed for whatever reason, it is not uncommon to see this not updated on your payslips. This could lead to you receiving a larger tax bill than you should have received and ultimately it will be your responsibility to pay it, not your employers.
HMRC may update your tax code if:
- you start to get income from an additional job or pension
- your employer tells HMRC you have started or stopped getting benefits from your job
- you get taxable state benefits
- you claim Marriage Allowance
- you claim expenses that you get tax relief on
- you may also be put on an emergency tax code if you change jobs
If you receive a change of tax code from HMRC, it is crucial that you check your next payslip to ensure this code has been updated by your employer. If not, then you must raise this with them immediately to avoid paying the incorrect tax amount to HMRC going forward.
Including Pension Contributions Deducted By Your Employer
If you pay into an employment pension scheme and your employer deducts these from your payslip then these are not to be included in your tax return. This is because you are receiving the tax saving via the payslip issued by your employer which automatically notifies HMRC through RTI (Real Time Information).
If you were to include the pension deductions in your self-assessment tax return, it would mean you are claiming the tax saving again which HMRC would then disallow and potentially charge interest and penalties for. If you’re a little confused, it’s always advised to speak to your employer who will no doubt clear it up for you.
Stop Claiming Marriage Allowance
Marriage Allowance lets you transfer £1,260 of your personal allowance to your husband, wife or civil partner.
Marriage Allowance can only be claimed when the transferee is earning less than the higher rate tax bracket (£50,271). Once their income goes over the higher rate tax bracket, they are allowed to claim the allowance up until the end of the tax year in which they go over.
After this point, then they must stop claiming this. If it is still claimed, then HMRC will disallow it and automatically amend the tax return which may lead to further interest and penalties being charged.
Student Loan Declaration
If you have received a student loan in the past, due to attending higher educational facilities, then you must state this on your personal tax return. HMRC collect repayments of student loans by knowing which plan you’re on and when it started i.e. Plan 1, 2, 4 and Postgraduate.
HMRC calculate the amount repayable subject to your earnings level. For example, if you have a Plan 1 student loan you’ll only repay when your income is over £382 a week, £1,657 a month or £19,895 a year (before tax and other deductions).
If you qualify for student loan repayment and do not state this on your personal tax return, or you specify the wrong plan, then HMRC could penalise you for the mistake.
Also make sure you include any deductions that have already been made through any previous employment, to ensure you do not pay too much in student loan repayments. The amount you have repaid through your employment can be found on your P60 or last payslip.
Child Benefit Declaration
You get Child Benefit if you’re responsible for bringing up a child who is:
- under 16
- under 20 if they stay in approved education or training
Only one person can get child benefit for a child. It’s paid every 4 weeks and there’s no limit to how many children you can claim for. In the 2021/22 tax year, you can claim £21.15 a week for your first child and £14 a week per child for any further children that are your responsibility.
You may have to pay back some of your Child Benefit in tax if you, or your partner’s, individual income exceeds £50,000. The charge is 1% for every £100 of income between £50,000 and £60,000. If adjusted net income is more or equal to £60,000, you will have to pay back the full amount. This has to be repaid by the higher earner even if it is the lower earner that receives the child benefit.
If you, or your partner, do earn more than £50,000 then you must tick the box on your annual self-assessment form that you are receiving child benefits. You can find this under the Reliefs section of the Miscellaneous tab on your self-assessment form. Failure to do so could result in a penalty fine by HMRC.
We hope this has outlined some of the most common tax return mistakes and how to avoid them. If you require any further information on any tax schemes, or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.