Employment Income
One of the most frequent mistakes made by those completing a Self Assessment tax return is forgetting to include their income from employment. Even if you’re a full-time or part-time employee and tax is automatically deducted through the PAYE system, this income still forms part of your total annual income and should be reported in your tax return.
HMRC considers your employment income when calculating the total tax due, especially if you have additional income from other sources. If you omit your employment income, you could end up underpaying your tax, which may result in additional charges or a formal review of your tax affairs.
You can find the details of your employment income on your P60, which summarizes your total pay and tax deductions for the year. If you leave a job during the year, your P45 will provide similar information for the period worked. You should use these documents when filling out the employment section of your SA100 Self Assessment tax return.
Income from Self-Employment
If you are self-employed, whether as a sole trader, freelancer, or small business owner, you are responsible for calculating and reporting your own income and expenses to HMRC. A key feature of the tax system for the self-employed is the trading allowance, which allows you to earn up to £1,000 of trading income in a tax year without having to report it or pay tax.
If your gross income from self-employment exceeds £1,000 in a given tax year, you must register for Self Assessment and complete the SA100 main return along with the SA103 form, which provides a summary of your self-employed earnings and expenses. You will be taxed on your profits rather than your income, and you can deduct allowable business expenses to reduce your taxable profit.
Typical allowable expenses include office costs, travel expenses, marketing, professional fees, and equipment. After deducting these from your gross income, the resulting profit is compared against your Personal Allowance. Only profits above this threshold are taxed. For many self-employed individuals, making accurate and timely tax calculations is crucial, especially when also liable for Class 2 and Class 4 National Insurance contributions.
Keeping detailed records of all income and expenses is vital for self-employed taxpayers. HMRC recommends keeping these records for at least five years after the 31 January submission deadline of the relevant tax year. Failure to maintain adequate records could result in penalties and difficulties if you’re selected for an audit.
Rental Income
Another key income stream that must be reported through Self Assessment is rental income. This includes earnings from residential or commercial properties, as well as income from land. Like the trading allowance, there’s a property allowance that allows individuals to earn up to £1,000 tax-free each year from property income. If you co-own a property, each owner can claim this allowance on their share of the income.
If your gross rental income exceeds £1,000 in a year, you must notify HMRC. If your income is between £1,000 and £2,500, you may not be required to complete a Self Assessment return, but you still need to contact HMRC to determine how your tax should be collected. If your gross income from property exceeds £2,500, you’re required to file a Self Assessment tax return and complete the SA105 supplementary page.
Landlords can choose to deduct the property allowance or actual expenses, but not both. Allowable expenses typically include maintenance costs, insurance, letting agent fees, council tax (if paid by the landlord), and mortgage interest (subject to restrictions).
If you choose to claim actual expenses, it’s critical to maintain accurate records and receipts. HMRC may request these to verify your claims. Additionally, landlords with multiple properties must combine income and expenses across all properties when completing their Self Assessment, rather than reporting each property separately.
Letting income is not just limited to traditional residential or commercial properties. Income from renting out parking spaces, holiday homes, or even a room in your own home (outside the Rent a Room Scheme) also needs to be considered. The key is to determine whether the income exceeds the relevant allowance and whether it is subject to Income Tax.
Declaring all sources of taxable income via Self Assessment is not only a legal obligation but a critical part of maintaining transparency with HMRC. We’ve examined how employment income, self-employment income, and rental income must be handled. Each comes with its own set of rules, allowances, and reporting requirements. Failure to understand and adhere to these obligations can result in financial penalties and unnecessary stress.
Savings Interest
Interest earned on money held in bank or building society accounts is considered taxable income in many circumstances. Whether or not you need to report this interest depends on the total amount earned and your overall level of income.
If your total income is relatively low, you might not need to pay tax on savings interest due to two important allowances: the personal savings allowance and the starting rate for savings. The personal savings allowance allows basic rate taxpayers to earn up to £1,000 in interest tax-free, while higher rate taxpayers can earn up to £500 without paying tax on it. Additional rate taxpayers do not receive a personal savings allowance.
In addition, individuals with a total income below £17,570 may be eligible for the starting rate for savings, which provides up to £5,000 of interest that can be received tax-free. The actual amount available under this rate decreases as other income increases.
However, any interest earned from tax-free savings accounts, such as Individual Savings Accounts (ISAs) or certain National Savings and Investments products, does not count towards either the personal savings allowance or the starting rate. If you receive more interest than your allowances cover, or if your total income including interest exceeds your personal threshold, the amount over the exemption must be declared through Self Assessment. HMRC uses this information to calculate any Income Tax that may be due.
If you are required to file a Self Assessment return for other reasons and have interest that has not been taxed at source, you should include it within the savings section of your SA100 tax return. Bank statements or annual interest summaries are useful tools for identifying how much interest you’ve earned in the tax year.
Pension Income
Retirement income is another key source that may need to be declared via Self Assessment. While some types of pension income are taxed at source under PAYE, others may not be, and the combined total of all your retirement income can affect your tax position.
Taxable pension income includes:
- The State Pension
- Additional State Pension
- Occupational or workplace pensions
- Personal pensions
The State Pension is not taxed at source, meaning it’s your responsibility to ensure any tax due is paid. Other pensions may have tax deducted before payment is made. However, if your total income from pensions and other sources exceeds your personal allowance, additional tax may be due.
The standard personal allowance allows you to earn a set amount of income each year tax-free. If your pension income exceeds this allowance, you will pay tax on the surplus. Most people can also take up to 25% of their pension pot as a tax-free lump sum, but regular pension income beyond that is taxable.
For individuals with higher income levels, Self Assessment is necessary to declare pension income and ensure that any additional tax due is accounted for. The SA100 main tax return includes a section for pension income. State Pension income should also be recorded, even though tax is not deducted automatically.
You should also be aware that deferring your State Pension may result in higher future payments, but this could push your income over the tax threshold. Keeping track of all pension sources and amounts is essential for accurate tax reporting.
Dividend Payments
Income received through dividends from shares can also be subject to tax and must be reported through Self Assessment when certain thresholds are exceeded. Dividend income is taxed separately from savings interest and has its own tax-free allowance.
As of the current tax year, the dividend allowance is set at £500. This means you can receive up to £500 in dividend payments without paying tax. Any dividend income above this amount is taxed according to your Income Tax band:
- Basic rate taxpayers pay 8.75%
- Higher rate taxpayers pay 33.75%
- Additional rate taxpayers pay 39.35%
If your total income, including dividends, falls below the personal allowance threshold, you may not owe any tax on dividends. However, when total income including dividends exceeds the personal allowance, only the first £500 of dividends is tax-free, and the remainder is taxed based on your total income level.
Dividend income may come from shares in UK companies or from shares in foreign companies, which may also have foreign tax implications. It’s important to retain dividend vouchers or investment account statements to verify income and declare it accurately.
You’ll need to complete the dividend section of the SA100 form when filing your return. If you hold investments in a stocks and shares ISA, dividends earned within the ISA are not taxable and do not need to be declared.
Failing to include dividend income can result in underpayment of tax, especially if your total income pushes you into a higher tax bracket. By understanding how dividends are taxed and ensuring they are properly reported, you can avoid unexpected tax bills or penalties.
Capital Gains Income
Gains you make from selling certain types of assets are considered capital gains and may be subject to Capital Gains Tax. These gains are typically realised from selling property, stocks and shares, personal possessions worth over a certain amount, or entire businesses.
Every individual receives a Capital Gains Tax annual exempt amount. Currently, this tax-free allowance is £3,000. If the total gain across all assets sold in a tax year exceeds this allowance, the excess is taxable and must be reported to HMRC.
The rate at which you pay Capital Gains Tax depends on the type of asset and your Income Tax band. For basic rate taxpayers:
- Gains from selling residential property are taxed at 18%
- Gains from other assets are taxed at 10%
For higher and additional rate taxpayers:
- Residential property gains are taxed at 28%
- Other gains are taxed at 20%
Certain costs can be deducted from your gains to reduce the amount on which you are taxed. These include the cost of acquiring the asset, improvements made to it, and costs associated with buying or selling, such as legal or estate agent fees. Some assets are exempt from Capital Gains Tax, including personal vehicles (unless used for business), items with a limited lifespan worth under a certain amount, and personal belongings given as gifts to a spouse or civil partner.
Reporting capital gains is done using the SA108 supplementary form, which must accompany your SA100 return if your gains exceed the annual exempt amount or if the total proceeds from asset sales exceed four times that threshold, even if the gain itself is not taxable. Failing to declare gains properly can result in penalties, especially when large property or investment transactions are involved. If you dispose of a residential property and owe Capital Gains Tax, it must be reported and paid within 60 days of the sale.
What Happens if You Don’t Declare All Your Income
Neglecting to report taxable income through Self Assessment can lead to serious consequences. HMRC has the authority to impose penalties, demand unpaid tax, and even pursue legal action in cases of persistent or deliberate non-compliance. The severity of penalties depends on the nature of the omission. If the failure to notify HMRC was unintentional, the penalty can be up to 30% of the unpaid tax. If it was deliberate but not concealed, penalties range from 20% to 70%. For income that was both deliberately hidden and concealed from HMRC, the penalty can be between 30% and 100% of the tax owed.
In addition to penalties, HMRC may charge interest on late payments. The longer the tax remains unpaid, the more interest will accrue. These financial consequences can significantly increase the amount owed and create ongoing financial pressure.
Penalties can sometimes be reduced if you inform HMRC about any errors or omissions before they discover them. This is known as making an unprompted disclosure. Transparency and cooperation with HMRC usually result in lower penalties and can help avoid further enforcement action.
Failure to report income may also trigger a broader investigation into your tax affairs, leading to audits that could stretch back several years. These audits require substantial documentation and can result in additional taxes, fines, and stress for the individual involved. If you find that you have forgotten to declare income or made a mistake on your return, it’s advisable to contact HMRC as soon as possible and amend your return. There are formal procedures in place for making corrections, and acting quickly can help reduce any potential repercussions.
Keeping Accurate Records
To ensure all sources of income are declared properly, it is essential to keep thorough and accurate records throughout the year. This includes maintaining receipts, statements, and documentation for all sources of income, expenses, gains, and deductions.
For capital assets, records should include purchase and sale documentation, improvement costs, valuations, and correspondence related to the transaction. These records should be retained for at least five years following the 31 January filing deadline of the relevant tax year.
Digital tools, accounting software, and professional advice can help keep records organised and ensure compliance. In many cases, investing in proper bookkeeping or accountancy support can prevent costly mistakes and missed deadlines.
Additional Sources of Income to Declare in a Self Assessment Tax Return
Beyond the most commonly discussed income types—employment, self-employment, rental income, savings, pensions, dividends, and capital gains—there are other taxable income streams that also require attention when completing a Self Assessment tax return. These lesser-known sources, if overlooked, can still trigger tax liabilities and result in compliance issues.
This part outlines further income categories you must report, such as foreign income, benefits in kind, income from trusts, compensation payments, and other less common but taxable earnings.
Foreign Income
If you’re a UK tax resident, you are generally required to declare your worldwide income, including foreign earnings. This might include wages from overseas employment, rental income from property abroad, foreign dividends, interest, or pensions.
You will need to complete the foreign section of the Self Assessment return using the SA106 supplementary page. In many cases, you may be able to claim Foreign Tax Credit Relief, which helps avoid double taxation if you’ve already paid tax in the country where the income originated.
Foreign income must be converted to pounds sterling using either the spot rate on the date received or an average rate approved by HMRC for the relevant tax year. Careful record-keeping of foreign exchange rates, tax paid, and local documentation is necessary.
Income from foreign investments held in overseas bank accounts is another area where omissions are common. With increased international data sharing through the Common Reporting Standard, HMRC is more likely than ever to detect undisclosed foreign income.
Income from Trusts and Settlements
If you are a beneficiary of a trust, you may receive income that is subject to UK tax. Trustees may pay tax on behalf of the trust, but beneficiaries still need to report the income on their own Self Assessment return, especially when receiving income net of basic rate tax. This is because, while the trust may have already paid tax, further liability could arise depending on your personal tax circumstances.
You’ll generally need to use the SA107 supplementary page to report income from trusts. If you receive a trust income distribution form (R185), it will detail the type and amount of income received as well as tax already deducted. This form should be kept as a key document for your tax records, as HMRC may request it as evidence.
The type of trust—whether it’s an interest in possession trust, discretionary trust, or a bare trust—determines how the income is taxed and who is responsible for reporting it. Discretionary trust beneficiaries, for example, typically receive income with a 45% tax credit, and they may be eligible to claim a refund if their own tax rate is lower.
If you are the settlor of a trust or have an interest in a trust you created, specific rules known as the settlor-interested trust rules may apply. These rules can make the settlor liable for tax on trust income, even if it’s not paid to them, particularly if the settlor or their spouse or civil partner can benefit from the trust in any way. Understanding the structure and purpose of the trust is crucial, as tax liabilities can arise in unexpected ways. Seeking professional advice may be necessary to ensure all obligations are met.
Benefits in Kind
Employees and directors who receive benefits in kind, such as company cars, private medical insurance, interest-free or low-interest loans, or accommodation provided by their employer, may need to report these on their Self Assessment tax return. These non-cash benefits are considered taxable income and are assigned a monetary value, known as the benefit’s cash equivalent, which is added to your overall earnings when calculating your tax liability.
Although employers are responsible for reporting these benefits through the P11D form submitted to HMRC, if you are required to file a Self Assessment return, these figures must also be entered accurately in your own return. It’s crucial to carefully review your P11D, usually provided to you by 6 July following the end of the tax year, to ensure that all details are correct and consistent with the information you submit.
Some benefits are taxed through your tax code, reducing your Personal Allowance during the year. However, if you have multiple sources of income or are underpaying tax due to unreported benefits, a balancing payment may be needed through Self Assessment. Misreporting or omitting benefits in kind could result in underpaid tax, which can trigger interest charges, penalties, or a review by HMRC. Keeping a record of all employer-provided perks and cross-checking them against your P11D helps ensure accuracy and avoids future issues.
Income from Compensation and Settlements
Not all compensation payments are tax-free. For instance, interest awarded as part of a court settlement is usually taxable. Similarly, redundancy payments above the £30,000 tax-free limit must be declared.
If you’ve received compensation for loss of income, damages, or mis-sold financial products, the taxable elements need to be considered. This often includes statutory interest, which should be reported and taxed as savings income.
Check the breakdown of any compensation you receive. A portion may be tax-free, while the rest could fall into taxable categories. If you are unsure, it is advisable to consult a tax professional or seek clarification from HMRC.
Occasional Income and Side Hustles
One-off income sources—such as selling personal items at a profit, casual services, hobby income, or freelancing on a small scale—can still be taxable if they exceed certain thresholds or are considered trading by HMRC.
Even if the income seems minor, it may be subject to tax if it becomes frequent or earns more than £1,000 a year. The trading allowance can be used against occasional income, but anything above it must be reported.
Examples include:\n
- Selling handmade goods or crafts online\n
- Running a car boot stall regularly\n
- Offering tuition, coaching, or consulting informally\n
- Renting out equipment or personal possessions\n
Always assess whether the activity constitutes a trade, and keep detailed records of income and expenses. HMRC uses criteria such as frequency, intent to make profit, and organisation to decide whether an activity is taxable.
Crowdfunding and Grants
If you’ve received money through crowdfunding platforms or small business recovery grants, these may also count as taxable income. Whether you are raising money for a product, service, or community project, the use of the funds and the benefit received will determine their tax status.
In the case of business crowdfunding (such as Kickstarter), amounts received are usually considered taxable income. If the contributor receives goods or services in return, the funds are treated as trading income.
Government or local authority grants—such as COVID-19 recovery funds or arts funding—may be tax-free or taxable depending on how the money is used and the scheme’s structure. Always review the grant terms to determine whether it should be reported.
Miscellaneous Income
There are other less common sources of income that should not be ignored. These include:\n
- Jury service compensation (if paid by the court)\n
- Income from intellectual property (royalties)\n
- Rent-a-Room income exceeding the annual threshold\n
- Income from social media or YouTube monetisation\n
- Prizes or awards received in the course of business\n
Each of these income types has specific guidance from HMRC. Some may have allowances, while others may need to be declared in full. If unsure, it’s safer to report and clarify with HMRC rather than omit something unintentionally.
Record-Keeping for Less Common Income
To avoid mistakes, maintain records for all types of income, not just the main ones. Documentation might include:\n
- Foreign tax certificates\n
- Trust payment summaries\n
- Crowdfunding platform statements\n
- Compensation award letters\n
- Royalty payment contracts\n
- Casual income receipts\n
Records should be kept for at least five years after the Self Assessment submission deadline. Digital tools or spreadsheets can help track occasional income and ensure all sources are accounted for in your return.
Why Disclosure Matters
Even if the income appears insignificant or the rules are unclear, failing to disclose it can still attract penalties. HMRC’s Connect system cross-references data from banks, employers, online platforms, and international tax agreements to detect undeclared income.
If HMRC discovers undeclared income, the consequences can include interest, penalties, and a formal investigation. Voluntarily disclosing underreported income typically results in lower penalties compared to waiting for HMRC to uncover it. Being proactive and transparent in your tax return helps establish a good compliance record and can reduce the likelihood of future scrutiny.
Conclusion
Completing a Self Assessment tax return is a legal obligation for millions of individuals in the UK, and doing it accurately is essential for staying compliant and avoiding unnecessary complications. This article series has explored the various types of income you must declare—ranging from traditional sources like employment and self-employment to more nuanced earnings such as dividends, capital gains, and foreign income.
Each source of income—whether it’s a salary, freelance work, rent from property, interest on savings, pension payments, share dividends, or gains from asset sales—can impact your overall tax liability. Many of these earnings have specific allowances, but exceeding those thresholds requires full reporting and potential tax payments. Failing to consider any one of these streams can lead to underreporting, which HMRC may penalise, especially in cases of intentional concealment.
Beyond the main categories, we also covered additional income sources such as trust distributions, benefits in kind, occasional freelance or hobby earnings, foreign income, grants, and compensation. These are often overlooked but just as important when it comes to providing HMRC with a complete picture of your finances.
Across the board, the key principles remain the same: maintain accurate records, understand what needs to be declared, stay within deadlines, and seek guidance if you’re unsure. The Self Assessment process, while comprehensive, provides individuals with the opportunity to ensure their tax affairs are in order and that they’ve claimed all allowable reliefs and deductions.
By approaching your Self Assessment tax return with diligence and transparency, you can avoid penalties, reduce stress, and ultimately ensure that your tax obligations are met fairly and efficiently. Whether your financial life is simple or increasingly diverse, understanding and correctly reporting all sources of income is the foundation of responsible tax compliance.