If you are employed or retired, you don’t usually need to complete a self assessment tax return for your income and declare to HMRC (HM Revenue and Customs).
Employers and most pension providers will pay you via a payroll system such as PAYE (Pay As You Earn) so Income Tax is deducted automatically and paid to HMRC.
If you’re a saver and an investor however, you may find that you have other income and gains that are not automatically recorded and therefore you need to declare to HMRC.
Failure to do so can resort in some nasty penalties.
The five main instances you may need to declare to HMRC
Being a Chartered Financial Planner, tax planning for clients is a big part of what I do. Over the years I have found there are five common instances when you may need to declare to HMRC.
#1 – Savings interest
Now interest rates are going up you may start to earn a bit more interest on your savings than you are used to.
Income Tax is payable on interest unless your savings are in an ISA.
For savings outside of an ISA there is something called the Personal Savings Allowance which means you can earn £1,000 in interest in a tax year if you are a basic rate tax payer and £500 if you are a higher rate tax payer without being taxed or needing to declare.
If your income from other sources is low then you may find your interest falls within your Personal Allowance or the Starting Rate For Savings and therefore is not subject to tax.
If you don’t qualify for any of the allowances then you need to declare to HMRC how much you have earnt in savings interest.
#2 – Dividends from investments
If you are a shareholder in a business (perhaps it’s your own business) or you invest in shares or units in funds, then income from the shares (dividends) is not automatically declared to HMRC.
Again, if you hold your investments inside an ISA then there will be no Income Tax to pay on those dividends.
Also, everyone is entitled to a Dividend Allowance of £2,000 (at time of writing) per year.
If your non ISA dividends are more than the Dividend Allowance you will need to declare to HMRC.
#3 – Rental income
If you own a second home and receive rent then this income is subject to Income Tax.
If you have no other income it may fall within your Personal Allowance however you are likely to still need to declare to HMRC.
#4 – Foreign income
If you have earnings from abroad then don’t assume they are automatically taxed in the country from where they came from.
Income from work abroad, a foreign property you own or shares listed in another country could all be subject to UK tax and mean you need to declare to HMRC.
If you are a UK resident and domiciled in the UK then usually UK tax applies to all worldwide income.
There may however be double taxation agreements in place to ensure you are not taxed on the same income twice from two different countries.
#5 – Investment gains
If you have sold an investment like a share, units in a fund or a second property then you will hopefully have made a gain on your original investment.
That gain is potentially subject to Capital Gains Tax and if so will need to be declared to HMRC.
Gains inside an ISA are tax free and everyone is entitled to a Capital Gains Tax allowance for those gains outside of an ISA, so there may be some protection.
How to declare to HMRC
If you find that you do have income or gains that you need to declare to HMRC then you will likely need to register for a self assessment tax return.
If your income and gains are small and a one off I would advise contacting them in the first instance as they may be able to collect the tax due via a change to your tax code if you are still working.
If you do need to complete a tax return make sure you register by 5th October following the tax year end (5th April).
Online is easiest and you will need to submit the actual return by the 31st January after the tax year end.
Even if you do already complete a tax return for another reason make sure you still declare income and gains from savings and investments where required even if you believe it falls within certain allowances.
You’ll pay a £100 fine if your tax return is up to three months late and the bill will keep increasing if it’s much more after.
If you are unsure on what you need to declare to HMRC then please get in touch for a free no obligation 15-minute call. We would be happy to review your tax position and suggest ways to reduce your overall tax bill. There’s lots of allowances and methods out there that legitimately reduce the taxes you pay.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.