Jenny Ross: It's time to tackle your tax return

'˜Tax doesn't have to be taxing' '“ so goes HMRC's famous slogan. But despite the reassuring voices of Adam Hart-Davis and Moira Stuart repeating the mantra in the long-running ad campaign, I expect many of us remain unconvinced. In fact, Hart-Davis himself later criticised the tax system for being too complex.

Contrary to the HMRCs old Hector advert, dealing with tax can be very taxing indeed. Picture: REX/Shutterstock

The results of a recent Which? survey certainly suggest that confusion reigns when it comes to tax rules.

We quizzed more than 4,000 members of the public to test their knowledge of a range of tax rules. More than half (51 per cent) didn’t know how much they can earn before they have to start paying tax. This amount – known as the personal allowance – currently stands at £11,850, but goes up to £12,500 from 6 April.

And despite millions of people holding an Isa, two-thirds of our respondents were in the dark about how much you can pay into one each tax year. The limit is currently £20,000, and you can split this however you want between cash and stocks and shares.

Frankly, it’s not a big surprise that the results were on the patchy side. The tax system is complicated and rules can change frequently – take the Isa allowance, which has jumped from £3,000 to £20,000 in the past decade.

And let’s face it, an encyclopedic knowledge of the tax system isn’t going to give you the same social advantage as being able to wax lyrical about the latest goings-on in the Premier League, or the new Netflix drama that everyone’s talking about. I’m yet to attend a dinner party where the subject of National Insurance has sparked scintillating conversation (just as well I have plenty of interests outside of work).

But the potential downside of not knowing basic tax rules is much bigger than not being able to contribute to water cooler chat. This lack of awareness could mean you miss out on valuable tax breaks and allowances. Take the marriage allowance – a tax break worth up to £900, which HMRC says around one million eligible couples haven’t claimed. To qualify, one of you needs to be a non-taxpayer – in other words, to earn less than the personal allowance (currently £11,850) – and the other needs to be a starter, basic or intermediate rate taxpayer, which means an income of between £11,850 and £43,430 in Scotland. You can apply online via HMRC’s website.

Familiarising yourself with the key tax rules is especially important if you’re one of the 11.5 million people who have to submit a self-assessment tax return. This group mainly includes those who are self-employed, but there are various other circumstances in which you’ll have to file one – for example if you have a pre-tax investment of £10,000 or more.

Some 11,000 dedicated individuals used Christmas as an opportunity to cross their tax return off their to-do list. But according to figures from HMRC released earlier this month – just three weeks ahead of the January 31 deadline – just under half of people still hadn’t got round to submitting theirs.

Worryingly, more than half of respondents in our survey thought you could only be fined £50 for submitting a late tax return. In fact, fines start at £100, and will shoot up the longer you leave it. In the most serious cases, where a tax return is a year overdue, you could be fined the same amount as you owe in tax. So don’t be an ostrich – now’s the time to tackle yours to avoid being hit with a penalty.

To keep last-minute stress at bay, take a few steps to get yourself organised. Start by gathering all the key documents – these might include your P60, P11D, your PAYE notice of coding and P45. You’ll also need receipts if you’re claiming expenses, as well as a copy of your accounts if you’re self-employed. Check HMRC guidance carefully to make sure you have everything you need.

If you’ve never filed before, you’ll need to register for a Unique Taxpayer Reference. This can take up to ten working days to arrive in the post. You’ll then need to apply for an activation Pin, which could take another ten days. If you have a UTR, but have forgotten it, check last year’s paperwork or get in touch with HMRC.

If you’re still chasing up missing figures, don’t let this prevent you from submitting on time. You’re better off giving an estimate in the first instance, and then sending the revised figures to HMRC as soon as possible afterwards.

While you might be tempted to rid yourself of the paperwork to celebrate being done with your tax return for another year, don’t get the shredder out just yet. You’ll need to hang on to it for at least 22 months from the end of the tax year if you’re employed or a pensioner; and for five years and ten months if you are self-employed or letting property.

The amount of time your tax return will take you will depend on how complicated your circumstances are, and how well you’ve kept records, but Which? research has found that it takes people an average of 3.4 hours. Not only will you have the satisfaction of ticking off an item that’s lingered stubbornly on the to-do-list, you’ll be able to get back to your Netflix queue before you know it.

Jenny Ross is Which? money editor