Worried About Your Tax Return?

With the end of the tax year in only a few months, many people are starting to ask questions about their tax returns and what their obligations are. This is especially true of those who work on a contract or freelance basis.

David Davies, of umbrella company Bar 2, was kind enough to supply this guide to tax returns for contractors.

It is normally about this time of year when we start to get a number of enquiries from employees who are worried about completing their self-assessment tax returns.

The first thing to consider is which method of payment you have been using?

If you are using the Umbrella service, then you are an employee of the umbrella company. As such, all the necessary income tax and National Insurance would have been deducted at the time when your payment was processed, however, if you have been sent a self-assessment tax return you will still need to complete it. On the other hand, if you have been paid via CIS, then you are a self-employed individual and as such you have a legal obligation to complete a self-assessment return and if you haven’t received one you need to call HMRC and request that they send you one.

Umbrella employees

Ordinarily, as an employee, you should not receive a request from HMRC to complete a self-assessment and there should be no need to complete a return if you have worked exclusively through one umbrella company this tax year.  If you have received one and the Umbrella Income was your only income you can request that HMRC remove you from the self-assessment system. Because all legitimate umbrellas are based on the PAYE system, all necessary tax and NI deductions should have been made from every payment processed on your behalf, and these deductions have been calculated on the basis of the tax code you have provided via a P45 from your previous employer, or a P46 form if one has not been issued.

The situation becomes slightly more complicated if you have additional income from another source, for example you also run your own business; do some work on a self-employed basis; have income from property or investments etc.  In such cases, a self-assessment return may need to be completed and any earnings that an umbrella have processed on your behalf should be recorded on a supplementary employment page. You should refer to HMRC’s guide How to fill in your tax return for more details.

When you complete the supplementary “Employment” page, you simply need to detail your gross earnings and tax deducted by your umbrella for the relevant tax year. If your employment with the Umbrella company ended before 5^th April 2011, these figures can be obtained from the P45 issued to you. If you were still employed by the Umbrella company on 5^th April 2011, these figures will be on the P60 issued earlier this year.

When completing the return, there is no need to do anything with the expenses you have claimed via your umbrella company. The Section from the supplementary “Employment”page headed “benefits from your Employment – use your P11D” can be ignored in respect of expenses which you have submitted to us for processing. This section of the return relates only to expenses which are taxable. There is no need to detail any travel-related or subsistence-related expenses on the form as the umbrella company you use, (your employer) have already correctly processed these on your behalf.

CIS subcontractors

As a self-employed subcontractor, you are obliged to submit a self-assessment tax return each year.

The tax year runs from 6^th April to 5^th April and as a self-employed subcontractor you will need to submit your completed return by 31^st October if you are completing a paper return, or by 31^st January if you are submitting your return online which is far quicker and simpler.

Self-employed individuals pay their tax in three instalments. The first payment is “on account” by 31^st January and is usually half of the previous year’s tax bill. A second payment, usually the same amount as the January payment, is due by 31^st July. Finally, on 31^st January the following year you must make a balancing payment, calculated from your actual profits for the year.

Submitting a self-employment return is also vitally important if you are to claim tax relief on any expenses you have incurred during the year – for example the travel to and from your workplace, replacement tools etc.

In summary

• You should not have to complete a self-assessment tax return if your only income for the tax year in question was via an umbrella company although if you have been sent one you will need to submit it
• As an umbrella employee, if you are required to complete a self-assessment tax return for other income, your earnings with the umbrella should be declared on a supplementary employment page
• You do not need to declare expenses claimed via the Umbrella company
• If you are a CIS subcontractor then you are obliged to complete a self-assessment tax return each year, if you don’t have one you must ask for one.