One aspect that can make the process of self-assessment complex is understanding which expenses can be used to reduce one’s tax liability legally. Some allowable expenses include office costs, travel costs, clothing expenses, staff costs, things bought to sell on, financial costs, costs of the business premises, and advertising or marketing. Each has specific guidelines on what can and cannot be claimed.
Furthermore, taxpayers have to consider aspects like National Insurance Contributions. Sole traders must pay Class 2 and Class 4 National Insurance depending on the business profits. Class 2 is a fixed weekly amount while Class 4 is a percentage of the profits.
When correctly done, the self-assessment process helps the taxpayer maintain full disclosure of income with the tax authority, thus reducing the risk of penalties and tax investigations. However, it is a meticulous process that requires accurate record-keeping of income and expenditure throughout the tax year. It also involves an understanding of what one is entitled to claim back in terms of tax allowances and reliefs.