Most taxpayers in the UK are taxed at source through their workplace or their pension provider using Pay as You Earn (PAYE) and so do not need to complete a tax return. This means that the money received has already had the tax owed taken off before it is paid. The PAYE coding system is intended to provide instruction to an employer about how much tax to deduct so that the right amount of tax is collected over the course of the tax year.
If your income is not fully taxed under PAYE then you may need to complete a tax return. Some of the reasons you may need to complete a tax return include:
- You let a property or a room in your home and receive income from renting (above certain limits each year).
- You have taxable foreign income from overseas savings, investments, pensions or employment.
- You are self-employed and received a gross income of more than £1000 in the tax year. This includes this includes any money you earn that is cash in hand.
- You are an off-payroll worker or contractor, providing services to a client through an intermediary.
- You are an employee but didn’t pay the correct amount of tax through your tax code.
- You have income from savings and investments above certain limits.
- You are not a UK resident but receive property income in the UK.
- You work in a business as a partner.
- You or your partner receive Child Benefit and your income is over £50,000. (£60,000 from 2024)
- You are an employee but want to claim tax relief on expenses of more than £2,500 per year.
Even if none of the above applies to you, if HMRC has sent you a letter or other notification stating you need to complete your self-assessment you will still need to complete it, unless HMRC agree to withdraw the return. If you do not understand why HMRC have notified you that you need to complete a return, you should contact them to find out why they sent you this return.
If you have not completed a tax return before, or did not complete one for the last tax year, you will need to register for self-assessment through the HMRC website https://www.gov.uk/register-for-self-assessment. For this you will need a Government Gateway User ID and password, which is sent by post, so the registration process will take some time. You can also register by post using form CWF 1.
If you are not sure whether you should complete a tax return, HMRC has guidance at https://www.gov.uk/check-if-you-need-tax-return.
You must tell HMRC about your income.
If you are not registered for self-assessment, HMRC will not send you a tax return or notification that you must submit a tax return. However, if you receive income in the tax year that is subject to tax and has not been taxed at source, you must tell HMRC about it.
There are some tax-free allowances for different kinds of income, and if your income is below this amount, you will not need to tell HMRC, but you should keep records of income and expenditure so that you can show that your income was below the threshold.
Principal sources of income that may have to be reported.
- Income from renting property.
If your gross income from renting property is less than £1,000 you do not have to report it. If your gross income exceeds £1,000 you must notify HMRC by 5th October after the end of the tax year and if the profit from renting property is over £2,500, you must register for self-assessment.
If you are renting out a furnished room in the house where you live, the income may be subject to the Rent a Room scheme. In this case, if the gross income is less than £7,500, you do not have to report the income and it is not subject to tax. There is more information at https://www.gov.uk/government/publications/rent-a-room-for-traders-hs223-self-assessment-helpsheet.
- Income from selling or providing services.
If you have income from a trading activity of buying and selling, providing services or other commercial activities you do not have to report this to HMRC if your gross income before expenses is less than £1,000. If your gross income exceeds £1,000 you must notify HMRC by 5th October after the end of the tax year and register for self-assessment.
An important consideration here is whether you are carrying on a trade. Selling a few personal possessions through a trading platform or at a car boot sale that you have owned for some time is different from regularly selling items that you have bought specifically to sell at a profit, or that you have made yourself to sell. HMRC look for certain characteristics to determine whether a trade is being carried on including a profit-seeking motive, the number and frequency of transactions, the interval between purchase and sale, how the assets were acquired and how the sale is organised.
You will only need to report income of over £1,000 from selling activity if it arises from a trade.
If your gross income from the activity exceeds £1,000 you will have to report your profit (gross income less allowable expenses). You will be taxed on the profit, not the gross income.
- Income from savings and investments
If you have income from savings of more than the exempt amount (£1000 or £500 for higher rate tax payers for the 2024/25 tax year) or income from investments of more than the exempt amount (£500 for the 2024/25 tax year) you must notify HMRC. If your total income from both savings and investments is more than £10,000 you must register for self-assessment.
- Overseas income
If you receive any kind of income from overseas: employment or pension income, savings and investment income, or income from property you must notify HMRC and you will need to register for self-assessment unless your only income is from savings and investments and/or property and the exemptions mentioned above apply.
- Capital Gains
If you make a gain on disposal of a capital asset you will need to notify HMRC if the gain is more than the annual exempt amount (£3,000 for the 2024/25 tax year).
What happens if I don’t tell HMRC?
If you do not notify HMRC that you are receiving income from a new source by the deadline of 5th October, you may be subject to penalties for this failure. The range of penalties is between 0%, (where HMRC accept that the omission was not deliberate, and you tell HMRC about the income within 12 months) and 100% (where the omission was deliberate, and the facts were concealed from HMRC.) There is more information on penalties for failure to notify at https://www.gov.uk/government/publications/compliance-checks-penalties-for-failure-to-notify-ccfs11/compliance-checks-penalties-for-failure-to-notify-ccfs11.
Will HMRC find out?
HMRC uses a software called Connect, a system that holds over 55 billion items of data relating to taxpayers including earnings and pension information, bank records from the UK and over 60 overseas countries, savings and investment records, credit and debit card accounts, records of activity on on-line platforms such as eBay and Airbnb, land registry data and social media activity. The system is intended to identify individuals and companies who have not declared their income correctly.
