Self-employed? Key ways to stop overpaying your 2022-23 tax return

Unlike Christmas, almost no one looks forward to tax return season, but with the self-assessment online deadline looming on Jan 31, “preparing your tax return” should probably be on your to-do list.

Tackling the task sooner rather than later can help avoid any last-minute panic – but lots of people still leave it until deadline day. This year, 861,085 filers submitted their tax return on the last day, with 36,767 filing in the final hour.

Regardless of when you decide to get the job done, Telegraph Money shares some top tips to help you get it right – ensuring you don’t pay more tax than you need to.

Claim all allowable expenses and capital allowances

The most effective way to legitimately reduce your tax bill is making sure you offset business costs against your pre-tax profits.

This will involve reviewing your costs for the year, and digging out relevant evidence to support your claim (receipts, bank statements and invoices, for example). You won’t need to submit this with your tax return, but should keep it in case HMRC requests to see it in future.

If there was also a “personal use” element to what you’ve spent, then you just claim a portion of the cost.

Dawn Register, tax partner at accountancy firm, BDO, said: “Certain expenditure can be deducted on a simplified flat basis. For example, this includes expenditure on vehicles – with ‘business miles’ in cars being 45p up to 10,000 miles, and then 25p per mile thereafter.”

If you work from home for at least 25 hours a month, you can also make use of the simplified “working from home” allowance.

Andy Chamberlain, policy director at the Association of Independent Professionals and the Self Employed (IPSE), said: “This enables you to claim for some of your utility bill costs, without having to manually apportion out what was used for the business.”

A separate deduction can still be claimed for fixed costs, such as council tax, insurance and mortgage interest, if an identifiable proportion can be attributed to business use.

Ms Register added: “For capital costs, such as the purchase of a vehicle, a computer or phone, relief is available by claiming capital allowances, with a portion of the cost disallowed if there is a ‘personal use’ element.”

The key here is making sure you are claiming everything you are entitled to.

Mr Chamberlain said: “Take time to ensure you have included all allowable expenses. You will probably have already factored in the obvious ones, such as equipment and stock. But things like training courses and marketing costs are sometimes overlooked.”

That said, you also need to be aware that some genuine business costs are not allowable for tax purposes.

Sam Dewes, private client partner at accountancy firm, HW Fisher, said: “Networking may be a vital part of making sales, but business entertaining is not deductible for tax purposes.”

HMRC details a full A to Z list of expenses and benefits on its website here.

Submit and pay on time

Fines can quickly add up if you miss HMRC’s deadlines. If you file late (after the Jan 31 deadline), you could get handed a £100 penalty.

If the return is filed more than three months late, you may have to pay £10 a day. Further penalties apply again if the return is more than six months late.

The same applies to making your tax payment when it is due. Late payment interest will be charged from Feb 1 (currently at a rate of 7.75pc), with a 5pc penalty charged on tax outstanding on March 1, 2024. Further penalties will be charged for late payment if the tax is more than six months late.

Seb Maley from tax insurance provider, Qdos, said: “While HMRC will issue a £100 fine off-the-bat to those who miss the midnight deadline on January 31, the rising interest rates slapped on top of late payments – currently 7.75pc – can accumulate very quickly.”

With this in mind, getting your tax return right is just as important as filing and paying it by the deadline.

Ms Register added: “As such, one of the best ways to save money is to submit your tax return – and pay your tax – on time. If you need more time to pay, it’s best to approach HMRC before you are late.”

Consider making a claim to reduce payments on account

When you submit your tax return for 2022-23, this will include a calculation of the “payments on account” you are required to make for the current tax year (ending April 5, 2024). These are due on Jan 31 and July 31.

If you believe your profits have fallen – perhaps due to lower income or higher expenses – you may wish to make a claim to reduce the payments on account, rather than overpaying and waiting for a tax rebate after you file your next tax return. The same applies if you think your tax liability will be lower due to tax reliefs, such as pension contributions.

Reducing the payments on account can improve your cashflow, but you need to tread carefully.

Mr Dewes said: “If the liability turns out to be higher than the reduced payments on account made, interest will be charged – currently at 7.75pc – on the reduced amount that should have been paid based on the original calculation.”

Upcoming changes to be aware of

Keeping on top of the latest tax rules is key to making sure you don’t accidentally get a fine, or pay more tax than you need to. These are some of the changes you’ll need to factor in when filing tax returns in the coming years.

Changes to the cash basis of accounting

Following an announcement in the Chancellor’s Autumn Statement, from April 6 2024, most trades will be able to calculate their profits on a cash basis – that is, only declaring money when it is paid in or out of your business – rather than accruing for income and expenses.

Mr Dewes said: “The existing restriction on claiming interest deductions under the cash basis will also be removed from that date.”

Business profits will be calculated for the tax year

From April 6 2024, business profits will be calculated for the tax year, rather than for the “period of account” ending at other points in the tax year, which may affect the amount of tax you’ll owe when you next file a return.

Ms Register said: “If your accounting date is not April 5, you are impacted by this change. The current tax year – ending April 5 2024 – is the transitional year, which may result in increased tax liabilities in this year.

“In order to best manage your cashflow, you may wish to complete your 2023-24 tax return well in advance of the Jan 31 2025 deadline to be able to plan for this.”

Changes to National Insurance

Another change due to kick in from April 6 2024 is a reduction in National Insurance contribution (NIC) rates for the self-employed.

Ms Register said: “Class 2 NIC at £3.45 a week is abolished, but those with profits above £6,725 will continue to receive access to contributory benefits including the state pension. This will be an annual tax saving of just less than £180.”

“Those with profits under £6,725 will be able to continue to pay Class 2 NIC voluntarily to get access to contributory benefits, and the £3.45 weekly rate has been frozen for 2024-25.

Ms Register added: “The main rate of Class 4 NIC will also be reduced to 8pc (down from 9pc). This applies to profits between £12,570 and £50,270. 

“Above this, the 2pc rate remains the same. So, if you are already paying Class 4 NIC, this represents a tax saving of £10 for every £1,000 of profit in the main Class 4 NIC band, up to a maximum of £377 per year.”

As the accounting period reform also takes effect from 6 April 2024, this will impact profits allocated to the 2024-25 tax year.