Understanding when to pay your Self Assessment and how it is calculated can be complex. Payments on Account add to the confusion. Lets look at this in more detail
The Basics
Self Assessment is the name given to the annual Tax Return process for individuals with complex tax affairs or untaxed income, including the Self Employed and Company Directors / Shareholders.
If your tax affairs are simple then tax is normally dealt with under PAYE rather than Self Assessment.
The return is made up to 5 April annually, and reports all sources of income, even if already taxed:
- Self Employment (sole traders)
- Partnerships
- Salary and Dividends from Companies (company directors)
- Salary and Wages from jobs
- Rents
- Savings Income, eg dividends and interest
- Capital Gains
A tax year runs from 6 April to 5 April, eg 6 April 2019 to 5 April 2020.
Tax assessed under Self Assessment for any given tax year is normally due on 31 January after the tax year, eg 31 January 2020 for 2018-19 tax year.
It can be paid via HMRC website, and HMRC will send you a statement by post (don’t forget to tell them if you move house).
Sometimes HMRC will collect small amounts of tax due from your tax code. They can only do this if you have a job as well as self employed income. They can often make a mess of this, so its best to tick the box on your tax return to ask them not to!
Payments on Account
If your tax liability is more than £1,000 then you will normally have to make payments on account for the next year, at a rate of 50% of the liability for the year just passed. There is a 50% payment on account in January and another 50% in July – these are offset next January. If the payments on account exceed the amount due you get a refund.
“Why do HMRC want me to pay my tax in advance?”. The thinking in HMRCs mind is its not in advance, you are paying in year as you earn – they regard the normal 31 January after tax year date as paying in arrears!
If you know your income will be lower next year, its possible to apply to HMRC to have the payments on account reduced – but a penalty interest rate is charged if the reduction is over claimed.
Payments on account tend to accelerate your tax payments if your business is growing, and the first time a payment on account is due, effectively 18 months tax in one payment, it can be an unwelcome surprise – to minimise this:
- make tax provisions each month as you go along – a separate bank or building society account is suggested
- get your Self Assessment in early so you know what is due
Reducing Payments on Account
If your Payments on Account are too high – because you expect the current years tax bill to be lower than the previous year then you can apply to reduce them either by:
- sending in a SA303 form or
- go into your online account with HMRC and there should be an option “reduce payments on account”
NB If you over state the reduction, retrospective interest is charged when its corrected.
Be aware that the Payment on Account will only be part of your January tax bill, so make sure you are looking at the correct aspect. The January tax bill will include over / underpayment for the previous year as well as the current years first payment on account.
Case Studies
This takes a bit of understanding. Lets look at a couple of case studies:
Case Study 1
-
- Tax bill for 2018-19 £1,200 – from your Self Assessment Return (let’s assume this is your first Self Assessment, so no previous Payments on Account have been made)
- 31 January 2020 pay £1,200 for 2018-19 and £600 (50%) on account for 2019-20 – total to pay £1,800
- 31 July 2020 – pay another £600 50% payment on account for 2019-20
- You are now £1,200 paid toward 2019-20
- Some when between 6 April 2020 and 31 January 2021, submit 2019-20 Self Assessment return. Assume tax due is £2,000
- 31 January 2021 – pay £2,000 for 2019-20 less £1,200 paid on account (at £600 per instalment previous January and July), so balance £800 to pay. Also a 50% on account for 2020-21 50% of £2,000 = £1,000 each instalment. Total to pay £1,800
- 31 July 2021 – pay another £1,000 50% payment on account for 2020-21
- Between April 2021 and January 2022, submit 2020-21 Self Assessment.
- 31 January 2022 – offset the £2,000 paid in advance against the final amount for 2020-21, and make 2021-22 first payment on account.
Case Study 2
-
- Tax bill for 2018-19 £1,200 – from your Self Assessment Return (lets assume this is your first Self Assessment, so no previous Payments on Account have been made)
- 31 January 2020 pay £1,200 for 2018-19 and £600 (50%) on account for 2019-20 – total to pay £1,800. However you estimate your 2019-20 tax bill will only be £500. Apply to reduce Payments on Account to £250 each. Total to pay £1,450
- 31 July 2020 – pay another £250 50% payment on account for 2019-20
- You are now £500 paid toward 2019-20
- Some when between 6 April 2020 and 31 January 2021, submit 2019-20 Self Assessment return. Assume tax due is £480
- 31 January 2021 – pay £480 for 2019-20 less £500 paid on account (at £250 per instalment previous January and July), so refund of £20 from HMRC. As the tax bill for 2019-20 is less than £500 no payments on account are due for 2020-21
- Between April 2021 and January 2022, submit 2020-21 Self Assessment.
- 31 January 2022 pay 2020-21 liability, plus a 50% Payment on Account for 2021-22 if 2020-21 is more than £500
