If you have to complete a Self Assessment tax return as a self-employed individual or sole trader, the deadline for the online submission of your tax return for the previous tax year is 31 January, and this is also the date you are required to pay any tax due. On 31 January, you may also be required to pay some tax in advance for the current tax, known as ‘payment on account’.
If you have become self-employed or a sole trader relatively recently, you may not be aware of ‘payment on account’, and if not prepared, this additional tax demand could come as quite a shock when coming round to completing your Self-Assessment Tax Return.
Make sure you are not caught out! Read on for our Go-to-Guide on Payment on Accounts for the self-employed and sole trader.
What are payments on account?
Payment on accounts put simply are advance payments towards your next tax bill. If budgeted for properly, they should help you spread your tax bill over the course of the tax year.
The payment on account payment is based on the amount you owed on your previous tax year.
The tax bill you are due to pay on 31 January may include income tax and national insurance contributions if you earn over a certain threshold in your self-employed or sole trader business. Your tax bill may also include student loan repayments.
Why do payments on account exist?
If planned for properly, payments on account are designed to help you spread the cost of your tax bill over the course of a tax year, rather than a lump sum on 31 January.
Who has to pay payments on account?
If you are self-employed or a sole trader and earn above £1,000, you must complete a Self-Assessment Tax Return and are also required to make payments on account. The only exception to the rule is that if you earn more than 80%of your income from Pay-As-You-Earn (PAYE) or the Construction Industry Scheme (CIS), and therefore the tax due on your income is ‘taxed at source’ or taxed immediately, and you do not have to make payments on account.
How are payments on account calculated?
You do not need to calculate payments on account yourself. These are calculated automatically when you submit a Self-Assessment Tax Return by HMRC. HMRC calculate your payment on account by looking at your last tax bill, less any tax paid at source and National Insurance Class 2 Contributions, student loan repayments or capital gains tax liabilities, and arrive at figure. This amount is noted as your projected tax bill due the following January for the current tax year, and is divided by two to arrive at your payment on account figure. The payment on account figure, therefore, is half your projected tax bill for the current tax year.
When are payments on account due?
Payments on account are due to HMRC on 31 January and also the 31 July. In effect you have paid your projected tax bill for the current tax year by 31 July and if you are still due to pay tax when you come round to completing your Self Assessment Tax Return towards the end of the tax year a ‘balancing payment’ may be due on 31 January, perhaps because your income was higher than the previous tax year.
How can I best prepare for a payment on account?
For most people, setting aside a rough percentage (%) of their ‘net’ income (after any expenses) in their first year, will help make sure that the initial tax bill, along with the payments on account can be met.
It is also a good idea to then do your tax return as early as possible so you know well in advance how much tax will be due by 31 January and how much your payments on account are.
You do not have to calculate payments on account yourself. HMRC will do it if you send them a paper tax return by 31 October. They are also calculated automatically as part of filing online.
Do I have to pay my payments on account?
Income can change from year to year, or even stop altogether. It is therefore possible to reduce your payments on account if you think that your earnings will be lower in the following tax year. This can be done by filling in a SA303 form or, if you file your tax return online, by logging into your HMRC online services account and clicking ‘Reduce my payments on account’ or via your Personal Tax Account. You should be careful to base it on a reasonable estimate of your income.
If you reduce your payments on account and it transpires you have underpaid, you will be liable to interest payments on the outstanding amount tax due at the end of the tax year.
Be warned, HMRC will charge a penalty if they think a request for payments on account was made negligently. Your tax bill could therefore be significantly higher in the long-term.
What if I can’t pay?
It is important that you contact HMRC immediately if you cannot pay all your tax on time as they can help and give you more time to pay. We strongly suggest you do not ignore the payments on account until after the tax payment is due, as contact before and help requested could mean allowing you to pay your tax bill in instalments, for example.
Help is available
At Mirandus Accountants, we understand what it is like to be a small business owner, as we are a small business ourselves. As a Chartered Tax Advisory practice, we are experts in tax, and as reflected in our testimonials, we provide tax expertise with empathy and understanding to your own unique set of circumstances.
We are available right now to help you complete your Self Assessment Tax Return early so you know how much tax you need to pay and by when.