Self-assessment tax is a system used in the United Kingdom to collect income tax from individuals who are self-employed or who have other sources of income not covered by the Pay As You Earn (PAYE) system. The tax liability for a self-assessment taxpayer is based on their income for the tax year, which runs from 6 April to 5 April. In this article, we will walk you through everything you need to know about paying your self-assessment tax bill in full and on time, as well as highlighting some common pitfalls and issues to be aware of.
For ecommerce sellers, it is important to understand the rules and requirements for self-assessment tax in order to ensure compliance and avoid penalties. This includes understanding deadlines for filing and paying taxes, reporting income and expenses, and handling taxes for cross-border sales.
Do to find out if you need to submit a self assessment tax bill
To find out if you need to submit a self-assessment tax return, you will need to consider your income and employment status. Generally, if you are self-employed or have other sources of income not covered by the Pay As You Earn (PAYE) system, you will need to register for self-assessment and submit a tax return. This includes individuals who sell goods or services online through platforms such as Amazon, Etsy, or their own website.
Additionally, if your income exceeds £1,000 in a tax year, you will also be required to register for self-assessment. You can check your obligations by contacting the HMRC or consulting with a tax professional. They will be able to advise you on your specific situation and help you determine if you need to submit a self-assessment tax return.
Other ways to find out if you need to pay tax
You filed a previous year’s tax return
You have already made payments on account or made previous self assessment payments
Are you self employed or have self employment income
Run a small business
Do you have to pay Capital Gains tax?
Do you have property income?
What is self employed income
Self-employed income for ecommerce businesses includes any income generated through the sale of goods or services online through platforms such as Amazon, Etsy, or an individual’s own website. This includes revenue from the sale of physical products, as well as digital products such as ebooks, online courses, and software. In addition, income from related activities such as affiliate marketing and sponsored content would also be considered self-employed income. It’s important to note that self-employed income is considered as revenue before the deduction of any expenses such as cost of goods, shipping, and marketing, rather than profit.
When to register for self assessment
The deadline for registering for self-assessment tax is the 5th of October after the current tax year in which you exceeded the threshold. This means that if you exceed the threshold of £1,000 in self-employed income or other sources of income not covered by the Pay As You Earn (PAYE) system during the tax year, you must register for self-assessment by the 5th of October in the following year and file an online tax return.
It’s important to note that if you’re already registered for self-assessment you don’t need to re-register unless there is a significant change to your circumstances. If you start a new business activity, for example, and it exceeds the threshold, you will need to register for self-assessment for that new activity.
In addition, you should always check with HMRC to make sure you’re aware of any recent changes or updates on the rules, as they can change from time to time. It is important to be aware of your responsibilities and to act on time to avoid fines or penalties from late registration.
Registering for self-assessment tax should be done by the 5th of October after the current tax year in which you exceeded the threshold of £1,000 in self-employed income or other sources of income not covered by the PAYE system. It is important to know if you need to declare income and ensure payment reaches HMRC on time.
Deadlines for Paying Your Tax Bill: when to pay tax
The deadline to pay your self-assessment tax liability is the 31st of January of the year following the end of the tax year, this is the online filing deadline. For example, the self-assessment tax liability for the year ended 5 April 2023 would be due for payment by 31 January 2024. The HMRC is giving you a total of 301 days to pay your final self-assessment tax liability.
However, if your income tax liability in a tax year exceeds £1,000 (and you did not pay at least 80% of your income tax through your PAYE code), then you are required to make instalments on account for the following tax year. There are two instalments on account due for each tax year on the 31st of January during the tax year and the 31st of July following the end of the tax year. Each of these instalments on the account is calculated as 50% of the prior year’s tax liability.
For example, if your income tax liability for the year ending 5 April 2023 was £5,000, this would need to be paid on 31 January 2024. In addition to this, you would need to make your first instalment on account payment for the tax year ended 5 April 2024 by 31 January 2024. This would be for 50% of the liability for the period ended 5 April 2023, which is £2,500.
The total payment due by 31 January 2024 in this example is therefore £7,500. The second payment on the account would then be due for payment by 31 July 2024. This would be for a further £2,500. Once the self-assessment tax liability for the period ended 5 April 2024 has been calculated, the balance would then be due by 31 January 2025. If for example, the liability was £6,000, then the amount due by 31 January 2025 in respect of the tax year ended 5 April 2024 would be £1,000 (£6,000 less the instalments on account already paid of £5,000). However, there would then be an instalment due against the tax liability for the tax year ended 5 April 2025 at the same time. This would be £3,000 (50% of the liability for the tax year ended 5 April 2024).
Payments on account
Payments on account for self-assessment tax is a system designed to help taxpayers spread out their tax liability over the course of the year, rather than paying it all in one lump sum. It applies to individuals whose income tax liability in a tax year exceeds £1,000 and who have not paid at least 80% of their income tax through their PAYE code. Under this system, taxpayers are required to make two instalments of 50% of the prior year’s tax liability, one on the 31st of January during the tax year, and another on the 31st of July following the end of the tax year.
How to pay self assessment tax bill
There are several different methods for paying a self-assessment tax bill . The most common methods include:
Online banking: Taxpayers can use their online banking account (bank transfer) to pay their self-assessment tax bill. It’s important to make sure that you have your Unique Taxpayer Reference (UTR) and payment reference number when making the payment.
Direct Debit: Taxpayers can set up a direct debit with the HMRC to pay their tax bill automatically on a regular schedule. This can be a convenient option for those who want to ensure that their payments are made on time and for those who want to spread out their tax liability over a longer period of time.
Debit or Credit Card: Taxpayers can use their debit or credit card to pay their self-assessment tax bill. This method can be done through the HMRC’s website, over the phone or by post.
Post: Taxpayers can pay their self-assessment tax bill by mail. This method requires that individuals send a cheque or postal order along with the payment slip provided by the HMRC. This method may take longer to process.
The personal allowance (PA) is a set amount of income that an individual can earn tax-free each year. The amount of the PA varies depending on the tax year, but for the tax year 2021-2022 it is £12,570. This means that if your income is below this amount, you do not have to pay any income tax.
The personal allowance is reduced by £1 for every £2 of income above £100,000, meaning that those with an income above £125,140 do not qualify for the personal allowance.
The dividend allowance is the amount of dividend income that an individual can receive tax-free each year. For the tax year 2021-2022, the dividend allowance is £2,000. This means that if your dividends are below this amount, you do not have to pay any tax on them. Dividends received above this allowance are subject to tax at the following rates: 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
When to Send a Tax Return to HMRC?
The tax year for individuals runs from 6 April to 5 April each year. A Self Assessment Tax Return can therefore be prepared and filed from 6 April onwards. It must, however, be filed with HMRC by 31 January to avoid penalties. It is recommended that you start preparing your tax return well before the deadline, in order to give yourself enough time to gather all the necessary information and ensure that the return is accurate and complete.
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Penalties for Late Filing
If you file your tax return after the deadline, you will be subject to a penalty. The penalty for late filing is initially £100, and it applies even if you have no tax to pay or if you have paid the tax due. The penalty increases if you file your return later. For example, if you file your return more than three months late, the penalty will be £10 per day for a maximum of 90 days. If you file your return more than six months late, the penalty will be £300 or 5% of the tax due, whichever is greater.
Penalties for Late Payment
If you do not pay your tax bill on time, you will be subject to late payment penalties and interest. This means that you will be charged interest on your self assessment tax returns. The late payment penalty is 5% of the tax unpaid at 30 days, and another 5% at 6 months and then another 5% at 12 months, this means that the late payment penalty can be a total of 15% of the tax unpaid. Additionally, interest is charged on the unpaid tax at the HMRC official rate.
Interest on overdue taxes is added daily, and it is important to pay your taxes on time to avoid as much interest as possible. You want to ensure you meet the payment deadline to ensure you do not pay interest.
The best way to avoid penalties is to file your tax return on time and pay your taxes on time. If you know that you are going to have difficulty paying your tax bill, you should contact HMRC as soon as possible to discuss your options. HMRC may be able to agree to a payment plan that will allow you to pay your taxes over a longer period of time.
Budget payment plans: if you have difficulty paying the tax bill
A budget payment plan for self-assessment tax is a way for individuals to spread out their tax liability over a longer period of time, rather than paying it all in one lump sum. This can be a useful option for those who may have difficulty paying their tax bill in full by the deadline, or who would like to manage their cash flow more effectively. Make sure to contact HMRC as soon as you can.
How it works
A budget payment plan allows you to pay your self-assessment tax in regular instalments, rather than one large payment. The amount and frequency of payments will depend on your specific situation and income level. To set up a budget payment plan, you will need to contact the HMRC and provide information about your income and expenses. Based on this information, the HMRC will determine your monthly payments.
To be eligible for a budget payment plan, you must:
Be self-employed or have other sources of income not covered by the Pay As You Earn (PAYE) system
Have a tax liability of at least £32
Expect to have difficulty when you have to pay your tax bill
Be up to date with your tax returns and payments
In conclusion, self-assessment tax for ecommerce business can be a complex process, but it is an important responsibility for anyone who sells goods or services online. By understanding the rules, deadlines, and requirements for reporting income and expenses, as well as handling taxes for cross-border sales, ecommerce sellers can ensure compliance and avoid any unnecessary penalties or fines.
We help business owners submit their self assessment tax return so if you have any questions or want your self assessment filed, please book a call and we will go through with you exactly what you need to do.