Newsflash – Girl finds filing taxes interesting! No way. Yes way. Well, ish …
Certainly a lot more interesting than I’ve ever found filing taxes before. Though I haven’t actually filed them yet …
But I’ve got the heavy lifting done: I’ve logged in online (the stumbling block that delayed last year’s tax return by 6 months), found my P-whatever forms from my employer, done the math on what I owe and gathered into a friendly pile everything I’ll need to fill in the blanks when I sit down on Monday evening to do it.
Officially the deadline is Tuesday night, so I’ll be a whole 24 hours ahead of time.
And should anyone out there find the following information timely: this year there’s an accidental extension!! According to the BBC, Her Majesty’s Revenues and Customs (HMRC) won’t fine people who file before February 2nd — that’s a 48 hour last-minute extension. We get extra time to procrastinate this year because the tax office goes on strike Monday. That’s the good news.
The bad news is that this year HMRC promises to be stricter about handing out fines. So it’s really not the time to do what I did last year. And if you’re in the same situation as I was — waiting till the last minute to file and then being unable to log in to the online system, you’re a lot less likely than I was to get through to a friendly tax matron on the phone.
But if you do miss the deadline, you can always write to your tax office and explain what happened. They accept the following level of excuse-making:
- Loss of documentation through theft, flood or fire (surely easy to arrange?)
- The onset of a life-threatening illness (possible to fake?)
But back to me. Why have I found filing my taxes interesting this year? Because in the past I’ve been so agitated by the entire process that I’ve never stopped to consider what the numbers I have to provide on the form actually mean.
This year I have.
To clarify, I have to file taxes because I rent out the flat that I own. In the past all my income tax was deducted from my pay check. I never had to file anything (well, never in the past 10 years or so, I did have a bust-up with the tax office in 2001 and had to pay all sorts of penalties, but after that they decided that my income was too straight forward to require filing.) As of last year I had to start filing again because I rented out my flat and the rental money counts as income … which means I need to report it and pay tax on it.
When I first decided to rent out my flat (that small property sitting atop the building pictured above) and go live somewhere else, I thought this was pretty unfair. I had hoped that the rent I collect from my property would cover the rent I now have to pay to life elsewhere. But no. It doesn’t work like this. It was my long suffering mortgage advisor that slowly explained this to me even though its not his job to explain income tax.
It was another patient soul who recently explained to me how to work out whether the 40% I have to pay still makes it worth it to rent my place. Let’s take a look at the numbers:
- I collected about £13k in rent last year
- I can deduct about £5k in costs associated with owning my property (letting agent fees, the interest on my mortgage, etc)
- This leaves me with £8k in profit
- Which, at 40%**, means I’ll be sending HMRC just over £3k of the profit
In the past I would have stopped there, exhausted, thrown the cheque in the post and thought that £3k was sort of a lot of money for the government to be taking from me on top of almost half my pay check* every month (I’ve never even used the NHS nor am I ever likely to collect benefit!).
But this year, now that I’m learning how money works, I’m asking myself a completely different question: is £5K a good return on my investment?
And it appears that the answer is yes … I think? I’ve more to learn before I can say for sure, but £5,000 is roughly a 5% return on the money I have in my property and if I was listening correctly, 5% is what a much more money-savvy person I know hopes to earn by playing the stock market this year. So my 5% earnings seem a good result? There probably aren’t that many other ways someone like me can make 5% on my money? I’ll test this tentative conclusion whenever Counting Zeros forces me to learn more about savings and investments, but for now I’m going to assume that a £5k profit is better news than a £3k tax bill is bad news. If that makes sense.
*I’ve just realised a big fat hole in my basic understanding of income tax … am I paying 40% tax on all of my salary or just the part of it that is over £35,000?? Answers welcome … [update, got answer … I pay 20% up until 35,000 or actually a bit higher given tax-free allowances and then I pay 40% on the rest of my salary … visit this link for a handy tax calculator]
** I don’t want to distress readers who aren’t in the 40% tax band — you pay less tax if you earn under £35k … more if you earn over £150