For those of you new to paying tax via self assessment you may or may not be aware of the term ‘payments on account’
Payments on account simply means that once your income tax liability for any one year is greater than £1000, HMRC determine that in addition to paying the liability for the year for which you are accounting, you should also pay for the following year in advance… if only we could all work that way – what a lovely cash flow improvement strategy!
They are however kind enough not to insist that you pay it all at once – you may pay in two instalments, the first by 31st January with your full liability for the previous year, and the second by the following July 31st.
So, how might this look in practice? Let’s say you have just completed your self assessment tax return for the year ending 5 April 2018. You have a tax liability for the year of which the income tax element (including Class 4 National Insurance contributions if you are self employed) comes to £1500.
This £1500 falls due for payment on or before 31 January 2019.
Additionally, by the same deadline, HMRC will request a payment on account of £750 towards the tax liability that they estimate you will have for the following year.
The second payment on account of £750 will then be due for payment on or before 31 July 2019.
HMRC have a good example on their website as to how this works in subsequent years with further balancing payments as your business or income grows.
But that’s not fair I hear you cry!! And much as we may feel that way, unfortunately there is nothing you can do about it. Looking on the bright side (?!), it really only hits hard in the first year in which your tax liability is greater than £1000, and/or if your income grows massively from one year to the next. Once you remove yourself from self assessment if you have paid too much upfront, you will of course receive a refund.
We are often asked by clients if anything can be done to reduce their payments on account liability, and the short answer is ‘it depends’. Anyone can apply to reduce their payment on account should they expect that their income in the following year will be less than in the year on which the liability has been calculated. However we do advise you to proceed with caution. Should it turn out that your income levels stay the same or even increase, you will be charged interest on any reduction of payment on account that should have been made according to the original calculation.
If you really can’t afford to pay the whole initial liability before January 31st, HMRC can be amenable to a payment plan, although be prepared for them to challenge you, as you will have had 9 months since the personal tax and accounting year end to make plans to have the fund available for payment, and they don’t view tardiness or poor planning as a good reason to be unable to pay.
We advise all our clients to complete their accounts and tax computations as early as possible after the year end has passed in order to be able to not only plan for payment of their tax liability, but also to use the financial information that they gain about their business while it is still timely and relevant in order to make informed decisions.
There are just a few more days until the end of the month, which means the deadline to make your July payment on account to HMRC in relation to your self assessment tax return is looming ever closer. We have been in touch with all clients who have payments on account due, but if you’re not sure if this applies to you, please do not hesitate to contact one of the team who will be happy to help you.
Likewise, if you have note yet put the wheels in motion to complete your self assessment tax return for the year ending 5 April 2018, we would encourage you to do this as soon as possible, whether you are doing this yourself, or asking your accountant to help you.
If you would like to have a chat or meet up for a no obligation review of your situation and a quote for us to do the work for you, please do contact us, either via the website, or any of the usual channels 🙂
If you are considering completing your own accounts and tax return this year and would like some guidance as to what to do and how, please have a look at our video on the subject below: