If you’re a Sole Trader and you’re gearing up for your 2013/14 tax return, the 31 January deadline might feel like a good while away yet. But it’s important to take the time to get your tax return right and avoid rushing in the run-up to the deadline.
Making mistakes on your tax return can be costly; certain errors can result in fines from HMRC, while others could mean you pay too much tax, which is bad news for your business’s cashflow. Our Chief Accountant Emily outlines five common pitfalls to avoid when you’re filling in your tax return.
1. Missing out expenses
If you pay for bona fide business costs from your own pocket you can still put them in your business’s accounts and thereby reduce the amount of profit on which it pays tax. Make sure you’ve included all your business’s day-to-day running costs, as well as all its income. Even those small out-of-pocket expenses add up; we found that at least a third of small business expenses are less than £10.
2. Missing non-cash costs
Some of your business’s day-to-day running costs won’t be paid for in cash at the time, but you may well still be able to put them in your accounts as costs and so claim tax relief on them. Classic examples of these are mileage claims that you incur for business travel in your own car, or a proportion of (or allowance for) your home running costs. If you’re entitled to claim tax relief on these costs, make sure that you include them in your accounts.
3. Incorrect calculations in spreadsheets
If you use spreadsheets to add up your business’s income and expenses, it’s very easy to miss a line or two out of your calculations and omit some expenses altogether from your tax return. That means that your profit will appear higher than it actually was, and you’ll pay too much tax. Check out this article to find out how spreadsheets could be holding back your business in other ways, too.
4. Omitting charitable donations
If you earned more than £41,450 in 2013/14, then you’ll be a higher-rate taxpayer - that is, you’ll pay tax at 40% on some of your income (32.5% on dividend income).
If you are a higher-rate taxpayer and you made any donations to charity under Gift Aid between 6th April 2013 and 5th April 2014, remember to record these donations in the main section of your tax return, so that you save some tax on them. If you forget to put the donations on your tax return, you won’t get this tax relief.
5. Pension contribution errors
If you pay money into a pension, you need to make sure you’re entering those contributions onto your tax return in the correct box and for the right amount. If you make a mistake here, you could either miss out on tax relief or claim too much (in which case HMRC could charge interest on the underpayment).
If you’re still employed, as well as running your own business, and your employer deducts your pension contributions from your salary, then in nearly every case you wouldn’t enter these pension contributions on your tax return. Tax relief is handled by the pension company itself. In that situation, part of your salary could become non-taxable, so make sure that you enter the correct figure on the Employment pages of your tax return.
If you’re at all unsure about what to enter in any part of your tax return, ask your accountant for advice.
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Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.