Outside your regular income, you may earn an additional sum that has gone undeclared to HMRC. Usually, this is a genuine mistake as you may not have been aware that you were required to do so. However, HMRC isn’t always so understanding - and can penalise you for not disclosing your full finances.
If you’re employed, tax is taken from your wages. But if you’re a self-employed sole trader and earning above your trading allowance (£1,000 as of 2019/20) in additional work - and you have not informed HMRC - then you’re committing tax avoidance.
To help keep you compliant, Mike Parkes from GoSimpleTax has provided the below guide to the most common unreported sources of income.
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Landlords are required to pay income tax on their rental profits. Specifically, you are expected to have earnings in excess of £1,000.
There are exceptions. If you reside in your very own rental property and receive less than the Rent a Room Scheme threshold, you won’t pay tax. In fact, provided your tenant pays less than £7,500 a year, you’re able to claim tax-free allowance.
Tips and commission
Income tax should be paid on all tips and commission, although the way in which you pay tax depends on the format of the tips and how they have been shared out.
Cash tips - when receiving cash tips, you’re required to pay tax but not National Insurance. If you file your own self-assessment tax return, you’ll be required to declare tips. If you work for an employer, HMRC estimates your earnings and collects tax through PAYE.
Card or cheque tips - employers will be responsible in this case, either by paying income tax through PAYE or pooling tips into a ‘tronc’. The ‘troncmaster’ then ensures tips are paid to each member of staff - with income tax being paid correctly.
Bonuses - commission and other bonuses are generally paid via PAYE, and yare liable for both tax and National Insurance. Cash-in-hand bonuses are illegal if the relevant contributions haven’t been deducted.
Income from savings
Your savings are largely covered by a Personal Allowance and your Personal Savings Allowance. The former - your tax-free Personal Allowance (that is, the amount of income which you don’t need to pay any tax on) - is currently set at £12,500, and the Personal Savings Allowance allows for up to £1,000 (depending on your income tax band).
Any income from savings interest that’s over your allowance will be taxed at your usual rate of income tax. If you’re self-employed, then you’ll need to report the accrued extra interest within your self-assessment tax return. For employees, this is paid automatically through a change in your tax code.
Foreign income means any income from outside the UK. For example, if you work abroad, have foreign investments or rental income on overseas property, you may need to pay UK income tax, depending on whether or not you are classed as a UK resident and where you are domiciled. It is your responsibility to declare any relevant foreign investment and property earnings to HMRC, again via your self-assessment tax return.
Of course, this is not an exhaustive list. There are additional forms of income which can go unreported, costing you a significant penalty. These include income from trusts, dividends and peer-to-peer loans.
Copyright © 2019 Mike Parkes of GoSimpleTax, providers of tax return software that can help you manage your self-assessment tax return. Sign up for a free 14 day trial now.