Why you should do your Tax Return early

Another tax year has been and gone, and the need to submit your tax return is as inevitable as the tide going in and out, just not as frequent. Last year’s tax return is not due until 31 January 2022, so why should you do it early?

The vast majority leave this until the last minute, or at least the last month or so, but there are lots of good reasons to do your tax return before then. In fact, for many, now is the ideal time to do it.

Payments on Account

Many people have to pay what are known as “Payments on Account”. These are advanced payments of tax based on your tax bill for the previous year. With COVID-19, lots of people may find that their income was lower last year perhaps from being on furlough, being self-employed with reduced income, being a landlord with a tenant who couldn’t pay, or being a small shareholder in larger firms that didn’t pay dividends.

If your income was lower last year, it is likely that these “Payments on Account” were too high. You will have already paid the first of these payments in January, but the second payment is due at the end of next month (31 July 2021) and it’s possible it could be reduced.

By submitting your tax return before 31 July 2021 you will know exactly what is your tax liability for the year, and so how much you need to pay in July. This may be less than previously thought, but it will not be more than even if your income has actually increased.  Surely, it’s better to pay less in July rather than pay more and get a refund in 6 months time.

If we already look after your tax affairs, I would encourage you to let us have your tax return details as soon as possible. If you currently prepare your own tax return, but think now is a good time to engage a professional to assist and ensure you receive all of the relevant reliefs, please get in touch with us.

Cashflow Planning

Even if you don’t have payments on account due in July, or you cannot reduce them, there are benefits in knowing your tax liability for the year as soon as reasonably possible. This gives you more time to make sure you have the funds available for January 2022 – you still have to pay the same amount but you have had time to get the funds in place. This is even more important if you need to put finance arrangements in place, give yourself time and space to find the best deal, rather than panicking in the days before the deadline.

For those more methodical in their tax savings, you may put money aside each month to cover your tax bill. Knowing as early as possible what your tax payments will be, allows you more flexibility in your plans. If you submit your 2021 tax return now, you will know the payments due in July 2021, January 2022 and July 2022 giving you the opportunity to re-organise your finances and possibly reduce your monthly savings, or take a lump sum out for a much needed holiday (within the UK or to a green list country of course). Now is the ideal time to submit your 2020/21 tax return to give you the full picture when making these decisions.

Real time data

Of course, all of the above is about looking back at what your income has been in the past, and what your tax liability on that income is. However, you can take the above one step further, and by maintaining details of your non-PAYE income electronically on a regular basis you can forecast what your tax liabilities will be in real time. In fact, in the next few years, certain individuals e.g. landlords, will be required to file real-time returns under the government’s Making Tax Digital regime – now is a good time to get into good practices. 

There are a number of solutions available to help you keep track, and we would be delighted to talk these through with you and help you get them set up. Please get in touch with myself or your usual Haines Watts contact if you are interested.