Looking at the HMRC website, the “common mistakes” they urge you to avoid in terms of filling out your tax return include: Remembering to sign and date it, checking each page, adding your tax reference number if you downloaded the form, using the right form for the right tax year and not scribbling notes on the form like, “Information to follow”.
That’s fine (if you are in a school exam!) but it’s not so helpful in terms of understanding where most people go wrong and how you can avoid some of the common pitfalls.
Here, from years of (sometimes bitter but usually helpful) experience, are my top ten tips in terms of that annual headache — filling in your tax return.
Mistake 1: Employment benefits
Probably the most common mistake is to forget to include your employment benefits on your tax return — things like company cars and private medical insurance may seem obvious, but many people omit them — and remember that other benefits like gym membership are taxable benefits too!
Mistake 2: Pensions
The most frequent mistake I see in terms of pension contributions, is either forgetting to include them at all, or putting the incorrect amount in. Most pension contributions are paid to the pension provider on a net basis — so £80 of pension contribution is £100 of gross contribution. Often people get these figures mixed up so make sure you know which is which.
Mistake 3: Gift Aid
A large number of people fail to include their charitable donations on their income tax return. If you are a higher rate taxpayer, you are missing out on getting a tax refund for this, so always keep a record.
Mistake 4: Small amounts of dividends and interest
Many people forget to include interest and dividends from small deposits and shareholdings. Your income tax return is supposed to include all sources of income so that your tax bill can be worked out correctly. If you are a low income earner you may also be able to reclaim some or all of the tax credit on deposit interest — this could amount to up to £1,600 per annum. So take the trouble to go through every small account you may have forgotten about — it helps to keep records or files so that there aren’t any half-dormant accounts left out because you don’t use them a lot.
Mistake 5: Rental income wear and tear allowance
Not claiming enough is the problem here rather than not declaring enough! The most common form of mistake for rental income is not claiming the 10% wear and tear allowance, (which reduces your taxable rent by 10% for furnished lettings). 10% can make a big difference, so make sure you claim this every time.
Mistake 6: Rental income mortgage interest
Another common rental income mistake is claiming the full mortgage payments instead of just claiming interest paid on the mortgage. Remember that you are only allowed to claim for the interest payments and not the capital repayments.
Mistake 7: Claiming capital losses
In terms of capital gains tax, the thing that most people get wrong is not including losses, thinking that this isn’t relevant as no tax is payable. However, by claiming losses you can carry them forward and reduce capital gains tax in future years, so don’t just leave them out — it could cost you in the long run.
Mistake 8: Foreign income
Many people fail to include foreign income on their tax return — even though it may be a small amount, it is required that you declare it. In many cases it will not increase your tax bill as you get a credit for the foreign tax paid.
Mistake 9: Trading losses
HMRC allows you to offset losses on trading in different ways — you can carry them back, offset against your current year’s income, or carry them forward. It can be complex to work out which is best for you and each person may vary in terms of the best way to offset losses. Often people do not realise and merely carry them forward without thinking about the tax reclaim they could make by carrying them back, or offsetting against other income in the year. Take professional advice if this applies to your business. See below.
Mistake 10: Not having an accountant
I should have made this mistake number one (obviously!). However, you needed to read the most common mistakes people make when completing their own tax returns above first, before deciding whether you should be using a suitably qualified accountant to prepare and submit your tax returns.
John Leyden is a director of Carbon Accountancy.