Four reasons to love your tax return as deadline looms

You’re not alone if the prospect of spending a cold, dark January afternoon completing your tax return fills you with dread.

From digging out all the paperwork you’ll need to finding your login details, let alone paying the bill, it always feels like a chore.

But should it really be that way?

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Completing a tax return forces you to think about your income, your savings and investments as well as your pension. And, if you fully embrace the process, it can be an excellent tax-planning tool that could actually reduce the amount you need to pay.

Here’s how:

1) Claim a higher rate of tax relief on pension contributions

If you are making regular contributions into a personal pension you’ve arranged yourself, such as a SIPP, your tax relief will be applied “at source”. This means that only basic-rate tax relief is applied automatically. However, if you are a higher or additional rate taxpayer, you can use your tax return to claim back the additional 20% or 25% tax relief on your gross pension contributions that you are entitled to.

To do this you need to complete the payments into pensions section on your tax return, in the “tax reliefs” section. Enter the gross value of your contributions, which includes the 20% tax relief that will already have been applied. If you have been a higher-rate taxpayer for a while and haven’t claimed the relief you’re owed before, the good news is you can backdate your claim for up to four years.

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If you have already completed your tax return, you can go back and update it before midnight on 31 January.

This relief can be offset against your tax bill for the year, reducing the amount you need to pay. Alternatively, if you are employed, you can request a change to your tax code which would bring down the amount of income tax that is deducted from your salary each month.

The situation might be different if you are saving into a workplace pension. Some schemes apply tax relief on a “net pay” basis. This means that your contributions are paid before tax has been deducted from your salary, meaning you get the correct amount of tax relief straightaway and you don’t need to submit a claim in your tax return.

The same applies if you make pension contributions using salary sacrifice.

2) Get tax back on donations to charity

It’s not just pension contributions that can earn you tax relief. If you make gifts to charity – and agree to Gift Aid – the charity will be able to claim basic rate (20%) tax relief on your donation. This means for every £100 you gift, the charity gets £125.

However, if you are a higher or additional rate taxpayer, you can claim back additional tax relief of 20% or 25% through your tax return. This equates to a further £25 for higher-rate taxpayers and £31.20 for those that pay the additional rate.

It’s down to you what you do with this money. You can donate it back to the charity or keep it yourself.

You can enter any donations to charity under the “charitable giving” section.

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If you have been giving to charity regularly but weren’t aware you could do this, you can make a backdated claim for up to four years.

It can be a chore working out just how much you have given to charity, but if you start keeping a record it will be much more straightforward. It might even encourage you to donate more to your favourite charities.

The Gift Aid scheme doesn’t just apply to donations charities. You can also claim tax relief on any donations you make to community amateur sports clubs.

To ensure your donation benefits from Gift Aid, it is important to tick the Gift Aid box when you make your donation. You will also need to supply your name and address and declare that you are a UK taxpayer.

3) You can claim for expenses – if you are self-employed

If you work for yourself, your tax return also gives you the opportunity to lodge all those tax-deductible expenses.

These essentially cover the costs you pay to run your business and can include anything from a laptop and printer to travel expenses and clothing.

Advertising and marketing costs, as well as insurance, banking charges, stock and any raw materials you might need are all allowable expenses too.

Lots of sole traders run their businesses from home, which means you can even claim relief on some expenses that you would be paying anyway like heating, electricity, council tax, and mortgage interest. You can’t claim for the whole value of these costs but you can claim a proportion of them.

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If you like a challenge, you can calculate a figure based on the proportion of your home that is used for business purposes and the amount of time you spend working. Alternatively, if you are a sole trader, you can you use a simplified flat rate. This works out at £26 a month if you work for more than 100 hours a month. You can find out if this approach will save you money here.

If you have only recently become a sole trader, you might be surprised about the number of expenses you can claim.

You can find out more information here, or you can contact the self-assessment helpline if you aren’t sure whether something is an allowable expense.

These expenses can be deducted from your overall turnover to reduce the amount of money that you are charged tax on. So, say your turnover is £50,000 but you have £5,000 in tax-deductible expenses, you will only pay tax on £45,000. This is referred to as your taxable profit.

4) It makes you more financially savvy

Last, but not least, there’s nothing like completing a tax return to make you think about your finances and start thinking about the steps you can take to help you pay less tax next time around.

Declaring gains on savings could be enough to prompt you to shop around for a higher interest rate, while that - as well as any capital gains declarations - could provide the push you need to embrace individual savings accounts (ISA) that shelter your money from tax.

Each year you can save and invest up to £20,000 in ISAs.

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This could mean opening an ISA if you don’t have one already, or if you do you can start moving any money in investments held outside tax wrappers into stocks and shares ISAs.

If, for example, you have any outstanding ISA allowance for the current year, you could sell shares up to the value of the capital gains tax (CGT) exemption - which is £6,000 until 6 April at which point it will drop to £3,000 - and immediately re-buy them within your ISA.

This is known as a Bed & ISA – in addition to reducing a looming CGT bill, it also means your money is sheltered from tax in the future.

Alternatively, if you earn more than £100,000 and are seeing the impact of a reducing personal allowance, your tax return could you the prompt you need to reduce your taxable income by paying more into your pension.