The end of July marks the deadline for second payments on account.
Designed to help self-employed people spread out their tax bill and reduce the time taken for HMRC to receive tax owed, payments on account can hit finances hard for those submitting returns for the first time.
What do payments on account involve?
Payments on account are made up of income tax and class 4 national insurance contributions that you may have to pay on your next bill – essentially, you will be paying your tax in advance, in two instalments spread across the financial year.
Payments on account generally affect all sole traders that have a self-assessment tax bill of over £1,000, of which less than 80% has been deducted at source.
Why has my tax bill increased?
Because payments on account effectively involve you paying your tax in advance, they inevitably have a big impact on those paying their self-assessment tax bill for the first time.
Payments on account are calculated as an estimate based on your previous tax bill. So, if you owe £1500 on your first self-assessment bill for 2016-2017, HMRC will estimate that you will also owe £1500 for the tax year 2017-2018. Paid as two separate instalments, you will be required to pay half of your tax bill at the end of January, and half at the end of July.
Effectively, this means that if you are paying your self-assessment bill for the first time in January 2018, you will pay your tax bill for 2016-2017 (i.e. £1500), plus your first estimated payment on account for 2017-2018 (£750), giving a grand total of £2250 to pay in January 2018, along with a further £750 at the end of July.
What can I do to reduce it?
While having to pay one and a half times your tax bill can be more than a little daunting, the good news is that it should balance out from your second year onwards. If your actual tax bill for the following year is slightly over your estimated total, you will only have to pay the extra balancing payment (plus, of course half of your estimated total for the next tax year), as you will have already paid the majority of your bill in advance.
There are also a number of other strategies you can take to avoid paying more tax than you should:
• Get your tax return in early
File your tax return early, and you’re more likely to receive any tax owed quicker. If you’ve made less profit in this tax year than last, get your tax return in as soon as you can to obtain your refund at the earliest possible opportunity.
• Forecast ahead
Being organised and filing your self-assessment in advance of deadlines means you are more likely to be able to take advantage of future payment planning. The sooner you know what your tax bill will be and when you have to pay it, the more efficient you can be at managing your cash flow.
• Take advantage of tax planning
How your business performs year on year will affect how you pay your tax. Submit your tax return early and you’ll be able to know how much tax you will owe for the following year – this isn’t just good for cash flow, it also gives you time to manage your accounts to take advantage of any new tax-saving strategies your new situation might entitle you to.
The key to all effective tax management lies in being prepared. Work with your accountant to file all returns in advance of deadlines, collate all paperwork with plenty of time to spare, and look forward to each tax year to better manage your finances.
A good accountant will have the ability to efficiently and effectively adjust the way you pay your taxes according to your circumstances – so if you think you might be paying more tax than necessary, your priority should be to find an accountant that will save you more money by enabling you to take advantage of tax-efficient savings.
We know that tax bills can come as an unwelcome hit to your finances – get in touch with us at Chippendale and Clark for a friendly, no-obligation discussion to see how we can reduce your tax bill for the future.