Small business owners preparing their first self-assessment return have been handed a last-minute reminder to budget for advance HMRC payments towards next year’s tax bill.
The Low Income Tax Reform Group (LITRG) has sent sole traders and small business owners a final warning ahead of the imminent 31 January deadline to ensure payments on account are understood and paid when necessary.
LITRG Chair Anne Fairpo, LITRG chair, said payments on account supported taxpayers, but were “easily overlooked”.
Payments on account (POAs) are advance payments towards an end of year tax bill, and are intended to give taxpayers a chance to spread out their payments. Each payment amounts to half the previous year’s tax bill, and are due by midnight on 31 January and 31 July.
For example, if your bill for the 2016/17 tax year is £3,000 – and you made two payments on account last year of £900 each (£1,800 in total) – the total tax to pay on 31 January 2018 is £2,700.
- A “balancing payment” of £1,200 for the 2016 to 2017 tax year (£3,000 minus £1,800)
- The first payment of £1,500 (half the 2016 to 2017 tax bill) towards your 2017 to 2018 tax bill
You have to pay £1,500, your second payment on account, by midnight on 31 July 2018.
If you’re self-employed, payments on account include class 4 National Insurance contributions (NICs).
There are two exemptions to payments on account, as outlined by HMRC:
- Your last self-assessment tax bill was under £1,000
- You have already paid over 80 per cent off all tax you owe, for example through a tax code or if your bank has deducted interest on savings
“In particular, many newcomers to self-assessment fail to factor in these ‘payments on account’ when budgeting for their first tax bill and are shocked when they owe more money than expected,” Fairpo said.
“If you think your tax bill will be less for 2017/18 than 2016/17 because (for example) you had less self-employed income, then it is possible to ask HMRC to reduce your payments on account.
‘”You need a reasonable estimate of the amount you will owe in 2017/18 in order to reduce your payments on account. If you reduce them too much, you could face interest charges, and even a penalty if the claim was fraudulent or negligent.”
If individuals submitting paper returns know their tax bill will be lower than last year and wish to reduce their payments on account, they should complete an SA303 form. Those filing online can use HMRC’s portal to request a reduction.
Fairpo added: “You must tell HMRC if you want to reduce your payments on account. If you simply pay a lower amount to HMRC, this will show on their systems that you have not paid enough and it is likely that they will contact you and you could be liable to pay a fine.”
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