Why you should file your tax return early

Posted by Alastair Mcdonald on Wednesday, May 4, 2016

Have you received that letter in the post from HM Revenue & Customs (HMRC) to file your tax return online by January 2017? January is months away but you can file your tax return any time after the 6th April 2016 and there are some great reasons why you should file your tax return in good time.

If you’re expecting to be in a refund position or your income is fluctuating from year-to-year, read our article to find out why the time is now to file your tax return.

You don’t need to pay the tax owed until the tax deadline

A common myth is that once your tax return is filed that you also have to pay any tax owed. 

The truth is, even if you file your tax return early with HMRC, you are only obliged to pay any tax liability by the normal due date of January 2017. You may need to watch out for payments on account though- read more about them below.

Tax refunds are accelerated

Why wait to receive your tax refund?  Once you file your tax return, your refund should be processed soon after. That means the money could be sat in your bank account earning interest sooner.  If you wait until January, refunds usually take longer to be issued as HMRC staff and systems can be overwhelmed at this time.

Under or over payments of tax can often arise on employees or directors, where HMRC has made errors with their tax codes. Building subcontractors operating under the Construction Industry Scheme are often in a tax refund position.

Large July payment due?

If you complete a tax return, your tax bill is under £1,000 and you don’t pay much tax at source (like PAYE for example), you’ll probably only make one payment of tax a year in January.

However, many sole traders and partners are normally expected to make additional payments in advance (so-called "payments on account") for next year’s tax bill. There are two payments on account to make; one in January and one in July. They are estimated based on this year’s position and will each be half of the current year’s bill. 

If your profits are fluctuating, it would be advisable to prepare your tax return as swiftly as possible and preferably before July. That way if the actual figure turns out to be lower, you can revise your July payment on account. This is better for your cashflow!

You have time to plan for any tax owed

Filing your tax return and calculating any tax liability arising, allows you the time to start budgeting and managing you cashflow.

If you pay your tax bill late, HMRC will charge you interest and possibly even late payment penalties.

Collecting the right amount of Tax Credits

If you are in receipts of tax credit or benefits, your claim needs to be renewed annually by 31st July, which involves letting the Tax Credit Office know of your income.

Whilst you may submit temporary estimates, it is preferable to submit the actual figures as soon as possible to avoid you being over or underpaid until the Tax Credit Office has received your actual figures.

You can use your tax code

The other benefit of filing early is that if you owe less than £3,000 in tax and you submit your tax return by 30th December 2016, you can opt to have your tax liability collected through your tax code.

This can be a great option for employees or pensioners, as they can have their tax bill collected from their wages or pension throughout the year easing the pressure on cashflow.

Buy yourself some time

If your affairs have changed this year, then preparing your tax return in good time ensures you have the space to think about any tax planning opportunities available to you.

Not rushing to complete your tax return should also reduce the risk of errors being made.  It also allows time for bank statements and any other financial documents you may need to file the return to be collated.

Not missing the tax return deadline

If you file your tax return late, you will be issued with an initial, automatic £100 filing penalty. It no longer matters how much tax you had outstanding. If your tax return becomes more than three months late, £10 daily penalties start to accumulate up to a maximum of £900.

A penalty of the higher of £300 or 5% of your tax due is then charged if your return is 6 months late and again if it becomes over 12 months late. All of these penalties are in addition to one another; rather than in place of. This can mean penalties for late tax returns can top over £1,600!

Despite HMRC’s best endeavours, a large number of taxpayers still choose to leave their return until the last minute. Around 890,000 tax returns were estimated to have been outstanding on 31st January 2015.

How Mcalistair Accountants can help

We are available right now to help you complete your tax return early so you know how much tax you need to pay and by when.  If you are due a refund then it makes perfect sense to receive this as soon as possible.  We're working with many self employed individuals and business owners who have already filed theirs and we are ready to help you too.  Call us today on the number below or complete our online form to make that first step.

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