Don't panic about your tax return

THE deadline is looming for completing self-assessment tax returns, which must be filed by 31 January to avoid a £100 penalty. This is also the date by which self-assessors must pay the tax owed for the first six months of the current tax year.

Jargon such as "payments on account", worries about doing it yourself and getting it all wrong, and the thought of the taxman knocking at the door are enough to bring the most sanguine out in a cold sweat. In some cases, thinking of how to pay the tax when income has fallen will set the pulse racing.

To help you begin, Scotland on Sunday has devised a ten-step approach to banish January's tax deadline blues.

1 Don't panic

If you haven't given a thought to your tax affairs since last January, there is still time, although only just, to file your self-assessment form online. This is in respect of the tax year which ended in April 2009. Finalising those earnings will also allow you to reduce your payments on account for this year if you need to.

It is probably too late now to submit a paper return, as the deadline was 31 October. However, you may escape a penalty if you still submit the paper form, provided you pay all tax due at the same time.

Otherwise you must register online. After this, you will be sent a password. It is then advisable to complete the return as soon as possible, as the system can be very slow in the week before the deadline, and glitches can occur.

2 Collect all the papers you need before you begin

If you are employed this will include a P60 detailing your earnings for the last complete tax year, plus a P11D outlining the benefits you have received, such as company car and medical insurance.

On top of this you will need bank-interest statements, dividend foils, Gift Aid records and personal pension statements (occupational pensions should have been deducted through your pay packet).

3 Draw up a set of accounts

This only applies to the self-employed. You have to draw up accounts showing your turnover for a 12-month period, and carefully deduct all the expenses.

You are required to be able to justify the expenses if the tax inspector asks to see them, which means keeping receipts for five years. In theory, you can be fined 3,000 for each missing receipt.

Don't be greedy, and only claim expenses that are genuinely vital to your business. Many forms of entertaining are not. And while travel is allowable, the taxman will look askance at a claim for two weeks for the family in Spain so you could attend one meeting.

Golden rule: don't attract attention. HM Revenue & Customs knows how much expenses are reasonable in any line of work, because it sees all your competitors' claims. Step out of line and you risk a full investigation.

4 Answer the first questions with special care

Once you have all this information you can begin the return, but it pays to answer the first question carefully, which brings up all the relevant sections that you will need to complete on the form.

Valerie Smart, head of tax at PricewaterhouseCoopers in Edinburgh, advises: "You want all your paperwork to hand, and to ensure you get the right sections up at the outset. The aim must be to begin the tax return and go straight through to the end in one go.

"It is not the easiest exercise if you have to keep going backwards and forwards because pages or information are missing. That makes the whole process very hard work."

5 Don't fill in unnecessary information

Investments held in Isas, whether savings in a bank or building society or share dividends, do not have to be entered on your form.

Neither do tax-free National Savings, such as savings certificates, although the taxable ones such as income bonds must be included.

Payments into a company pension are not required to be included, but other pension contributions must be. However, all forms of pension payment, whether from a company, private annuity or the state, must be included as these are taxable.

6 Work out the figures carefully

Always add up totals rather than listing, for example, every bank account or share dividend.

Do the sums with care, and double-check your arithmetic.

7 Don't forget the extras

Many people nowadays have rental income either from a holiday home, buy-to-let or simply renting out part of their home. The rental income must be declared, but this can be reduced by expenses. A further 10 per cent of the income can be sliced off for wear and tear of furniture.

Another item for higher rate taxpayers to remember is Gift-Aid contributions. If you give money to charity under Gift-Aid, the charity can claim back the basic rate tax, but you can claim the higher rate top-up. Most people never bother because they can't remember all the Gift Aid donations they have made. Try studying your bank statements to see if that jogs your memory.

8 Print the return out

Don't check it online, as that is too unwieldy.

9 Check carefully

Do the figures look right? Does it all add up? Does anything look odd or out of line?

10 Pay any tax due

Those who make payments on account, such as the self-employed, must pay the balance owed on the previous tax year, plus the first six months owing on the current tax year, based on the previous year's earnings.