Why you should prioritise reviewing your tax position and filing your tax return early this year

Many individuals need a deadline to spur them into action and getting a tax return filed is no different. This is perhaps best evidenced by the fact that some 800,000 2021/22 self-assessment tax returns were filed on 31 January 2023 – the day of the filing deadline for 2021/22 tax returns – representing more than 6.6% of the total expected returns for that tax year. 

Here are some key reasons why individuals should prioritise reviewing their tax affairs and look to submit their tax returns early this year:

• The earlier an individual prepares their self-assessment tax return, the more time they will have to plan to meet their tax liability for the year. For example, crypto investors often want to know their tax liabilities soon after the tax year finishes so they can ensure they keep enough cash aside to pay any tax and ensure such funds aren’t exposed to crypto market volatility.
• Late payment interest will accrue on any tax liabilities paid late, even where penalties are mitigated. HMRC set its annual late payment interest rate, for almost all taxes, at 2.5% above the Bank of England base rate, which is presently 4.5%. With a rise to 7% imminent, HMRC’s late payment interest rate is at its highest level in almost 15 years. Taxpayers will want to avoid being stung with punitive interest charges and make sure they pay their tax on time.
• Buy-to-let landlords may be surprised to see that their 2022/23 tax bill has not gone down much, even though their mortgage costs may have increased significantly. This is because tax relief on finance costs is restricted for most unincorporated landlords of residential property. As a result, most landlords can, at best, only claim a 20% tax credit on their finance costs. It’s quite possible that many landlords will have to pay tax this year despite making a commercial loss. They may therefore need time to establish how they will find the funds to pay any tax liability.
• Reviewing their tax position at the earliest possible opportunity gives taxpayers the most time to identify any costly oversights from the previous year, particularly if it turns out tax has been underpaid given the higher interest rates now.
• An early review of an individual’s tax affairs could identify potential opportunities for future efficiencies. For example, transferring interests in income-bearing assets to lower-earning spouses may be an option for some.
• Sole traders and those in partnership need to be aware that we are now in the transitional year for ‘basis period reform’. From the 2024/25 tax year, nearly all unincorporated businesses will be taxed on profits generated in the tax year, ie 6 April to 5 April. For taxpayers whose unincorporated business does not have a 31 March to 5 April accounting year end, the transition year will see them being subject to income tax on additional profits. As a default, 20% of the transition profits will be taxed each year for five successive tax years. Looking at their tax affairs early could prompt unincorporated business owners to consider whether they should change their accounting period end in the 2022/23 tax year. This could give taxpayers more peace of mind and visibility of their upcoming tax payments.
• Finally, submitting a tax return early starts the 12-month clock for HMRC to open an enquiry into the return. The sooner it is submitted, the sooner that window of opportunity is closed for HMRC.

It is inevitable that some taxpayers will always leave things to the last minute, but if there was ever a tax year in which to break that trend, it is this one.