If you’ve spent your working life employed and paying tax through PAYE, you might assume your tax affairs are relatively straightforward. But what happens when you inherit a property, start earning additional income or experience a significant change in your personal circumstances? Suddenly, you could find yourself needing to complete a self-assessment tax return for the first time, with new responsibilities and potential tax liabilities you hadn’t anticipated.
When personal circumstances change, so can your tax obligations
Some of the biggest changes to an individual’s tax position arise from events that have little to do with their day-to-day employment.
Inheriting a property is a good example. Someone who has worked for the same employer for 20 years might suddenly find themselves owning a second property following the death of a relative. If they decide to sell that property, capital gains tax may be payable on any taxable gain. Alternatively, renting it out introduces an entirely different set of considerations, including declaring rental income, understanding allowable expenses, keeping records and potentially making payments on account.
Divorce can also have significant tax implications, particularly where, businesses, property or investments are involved. Married couples can generally transfer assets between themselves without triggering capital gains tax. However, following separation, the rules become more complicated. Although changes introduced in 2023 provide greater flexibility over certain transfers, the timing and circumstances of dividing assets remain important.
Even seemingly positive developments, such as receiving a promotion, can affect your tax position. Once adjusted net income exceeds £100,000, your personal allowance begins to reduce, potentially increasing your overall tax liability. If you are completing a self-assessment tax return for the first time, read our article on what HMRC don’t tell you.
Why assuming HMRC already knows can be costly
One of the most common misconceptions is that HMRC automatically receives all the information needed to calculate someone’s tax correctly.
While PAYE handles tax deductions from employment income, it does not necessarily account for additional income sources or changes in personal circumstances. Someone receiving rental income, starting self-employment or generating taxable income or gains through investments may need to report these separately. Even having multiple jobs can create complications if tax codes are incorrect.
Importantly, changes can work both ways. Someone who retires, closes their business or sells a rental property may no longer need to complete self-assessment returns. However, outstanding reporting obligations must still be addressed, and HMRC should be informed where appropriate.
The assumption that everything will be dealt with automatically can lead to unexpected tax bills, interest and potential penalties.
The importance of timing and proactive tax planning
The financial consequences of overlooking a life event can be considerable. Selling a property without understanding the potential capital gains tax liability could result in a bill running into thousands of pounds. Equally, failing to review your circumstances could mean missing valuable tax reliefs.
For example, higher-rate taxpayers making personal pension contributions may be entitled to additional tax relief that is not automatically reflected in their pension payments.
Timing also matters, as some financial decisions can be planned around the tax year to make better use of available allowances and reliefs. Others, particularly those involving bereavement or separation, cannot be anticipated. The important point is to consider the tax implications as early as possible, ideally before making significant financial decisions.
Understanding your position before it becomes a problem
A useful starting point is to ask whether anything has changed in how you earn money, what you own or your personal circumstances. If the answer is yes, it is worth reviewing whether your existing tax arrangements remain appropriate, and this is where tax advice makes the difference.
Scott Reynolds, our Tax Advisor advises, “speaking to an accountant early, and providing as much information as possible about any changes, can help you to identify potential liabilities and available reliefs before decisions are finalised”.
Whether you have experienced a major life event or are planning a significant financial change, seeking professional advice can help ensure you meet your obligations, make informed decisions and avoid unexpected tax bills.