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Guide To Self-Assessment Payment On Account

self-assessment payment on account

While self-employment has many fantastic benefits, there is one issue that is a thorn in the side of many self-employed people: taxes. Unlike people in traditional employment, self-employed people are responsible for calculating and paying their own income taxes. This is done through self-assessment payment on account which is an estimate of a person’s tax obligations for the first half of the following tax year. This money is owed to HMRC and is calculated depending based on income and tax deductions.

If you do not pay the taxes you owe, you could be facing a fine or more serious legal penalty so it is crucial that you know how to calculate your taxes and when to pay them. To help with the process, here is our in-depth guide to self-assessment payment on account.

What does Payment on Account Mean?

Put simply, payment on account is when you estimate how much tax you are eligible to play in the first half of the coming year. This is calculated based on your taxable income on your previous year’s tax returns, so it is crucial that you hold onto all of your financial records.

The money owed will usually be usually paid bi-annually. The first instalment must be paid to HMRC before the last day of January but can be paid as soon as you complete your previous year’s Self-Assessment. Most people do this between October and December. The other half must be paid by April 30th so it is highly advisable to get it done as early as possible to reduce the chances of making a costly mistake.

Who is Eligible for Payment On Account?

Everybody in self-employment is eligible for payment on account, with a few rare but notable exceptions (charities and non-profits, for example, are not eligible for payment on account but some still pay it to avoid future liabilities.)

If you are the owner of a limited company, you are still personally eligible for payment on account, even if you choose to pay it using your business account. It is also permitted to make payment on account on behalf of other people including self-employed family members. Some individuals choose to do this because they prefer to pay taxes throughout the year rather than in one annual lump sum. However, if you intend to make payments in this way, the person must first have registered for Self-Assessment online, after which you can pay by debit card or through direct debit.

What is the Purpose of Payment On Account?

The system was first introduced in 1990 to help companies and self-employed individuals. The intention was to help them spread their taxes over a year rather than having to pay them all on January 31st as was the previous setup. This is often very useful for individuals and small businesses because it gives them a bit of breathing room financially and helps to avoid any potential cash flow issues. For example, if you are a self-employed carpenter, you may have several big projects lined up for the summer months but very little work (and income) in the winter.

Since 1990, there have been changes in the way the process is run. For example, you will now automatically receive a reminder from HMRC when instalments or due or if you have overpaid on your taxes. Even so, it is still very important to keep on top of your tax affairs to avoid any penalties.

HMRC taxes

How to Pay HMRC

There are a few different ways that you can pay your payment on account to HMRC. The most common method is Direct Debit, which can be set up easily online through the GOV.UK website. You can also make a payment by debit card or through your personal tax account.

If you decide to pay online, you will be sent an email from HMRC with a link that will take you to the secure payment page. It is very important to keep an eye out for this email because if you do not make a payment by the due date, you will incur penalties. If you prefer to pay by Direct Debit, make sure you set it up well in advance of the payment deadline to avoid any potential issues.

How are NICs Paid in Payment on Account?

If you are self-employed, you will also need to pay national insurance contributions (NICs) as part of your payment on account. The amount you need to pay will be calculated based on your taxable income from the previous year.

Like the tax payments, NICs are usually paid in two instalments with the first due on or before January 31st and the other by April 30th. You can find more information on national insurance contributions on the GOV.UK website.

An Example of Payment on Account

Here’s an example to help illustrate how payment on account works:

Let’s say that your taxable income from the previous year was £12,000 and you are self-employed. This would mean that you would be required to pay £240 in national insurance contributions and £240 in income tax for the current financial year.

Your first payment on account would be £480 (50% of £960, which is the total amount you owe) and would need to be paid by January 31st. The second payment on account would be another £480, due by April 30th.

If your taxable income for the current year was to be £15,000, your national insurance contributions would increase to £300 and your income tax payment would go up to £450. Your first payment on account would now be £900 (60% of £1500) and would need to be paid by January 31st. The second payment on account would be another £600, due by April 30th.

As you can see from the example, your second payment on account will be lower than your first if your taxable income has gone up (or vice versa). This is because the payments are based on an estimation of what you will owe at the end of the financial year.

How to Reduce Payments on Account

There may be times when you find yourself with a surplus in your tax payments – for example if your taxable income is lower than expected. In this case, you can apply to HMRC to reduce your payments on account.

To do this, you will need to fill out a form called the ‘Self-Assessment Payment on Account Reduction Request’ which can be found on the GOV.UK website. Once you have filled out the form and returned it to HMRC, they will reassess your payments and let you know if your request has been successful.

There are also various deductibles you can claim against your taxable income. These include expenses such as travel, office costs, and professional fees. You can find a full list of deductible expenses on the GOV.UK website.

What to Do if You Overpay

If you find that you have overpaid on your taxes, don’t worry – HMRC will refund any overpayment as soon as possible. In most cases, the refund will be paid automatically into your bank account within 30 days.

If it has been more than 30 days since you made the payment and you have not received a refund, you can contact HMRC to enquire about the status of your refund.

What to Do if You Underpay

If you have underpaid your taxes, you will need to pay the outstanding amount as soon as possible. In most cases, you will be able to do this online through your personal tax account.

If you are unable to pay the full amount immediately, you can contact HMRC to arrange a payment plan. It is very important to stay on top of your tax payments, as HMRC may charge interest and penalties if you fall behind. If you overpaid in a previous tax year, you may be able to use this money to help pay off your outstanding debt.

calculating taxes

Registering as Self-Employed with HMRC

If you are starting your own business, it is important to register as self-employed with HMRC. This will ensure that you are paying the correct amount of tax and National Insurance Contributions (NICs).

You can register as self-employed online through the HMRC website. The process is relatively straightforward and you will be able to download a guide to help you through it.

It is important to remember that you are responsible for registering as self-employed, even if your business is run through someone else’s company.

Filling in Your Self-Assessment Tax Forms

Once you have registered as self-employed with HMRC, you will need to complete a self-assessment tax return each year. This is a document that summarises your income and expenses for the year and is used to calculate how much tax you owe.

You can complete your self-assessment tax return online through the GOV.UK website. The deadline for filing your return is usually January 31st so make sure you don’t miss the deadline or you may be subject to penalties.

When completing your return, you will need to declare any income you have received from self-employment, as well as any other sources of income such as rental properties or investments. You will also need to list all of your expenses, including things like office costs, travel expenses, and professional fees.

If you are unsure about anything on your self-assessment tax return, you can contact HMRC for help.

The Importance of Financial Transparency

As a self-employed individual, it is important to be as transparent as possible when it comes to your finances. This means keeping accurate records of your income and expenses and filing your self-assessment tax return on time each year. Keeping accurate records is always a good idea regardless of tax necessities because it makes it easier to keep track of your business finances.

Being transparent with your finances will also help to build trust with HMRC and will make it easier to resolve any issues that may arise. It is also important to remember that you are required by law to keep accurate financial records for at least six years.

Other Considerations

There are a few other things to keep in mind when you are self-employed in the UK. Firstly, you will need to make sure you are registered for VAT if your business turnover exceeds £85,000.

Secondly, you need to be aware of any insurance policies you need. This will depend on the industry you are working in. For example, if you own a construction company, you will need to have employer’s liability insurance.

Finally, it is always a good idea to seek advice from an accountant or financial advisor if you are unsure about anything. This will help to ensure that you are complying with all the relevant regulations and that you are making the most of any tax allowances and reliefs available to you.

By following these tips, you can make sure that you are compliant with the tax rules in the UK and avoid any problems down the line. If you have any further questions about self-employment or tax in the UK, you can contact HMRC for help.

The Benefits of Self-Employment

There are a number of benefits to being self-employed in the UK.

  • Firstly, you have complete control over your own working hours and can choose to work as much or as little as you want.
  • Secondly, there are no restrictions on who you can employ so you can grow your business at your own pace.
  • Thirdly, you can claim a range of expenses against your income, which can help to reduce your tax bill.
  • Finally, self-employment offers a level of flexibility and freedom that is not always available in traditional employment arrangements.

If you are considering starting your own business, the UK is a great place to do it!

successful tax payment

Final Thoughts

Self-assessment payment on account can be a very useful system for those who are self-employed in the UK. It helps to spread the cost of your tax bill and can make it easier to budget for your annual tax liability.

If you are self-employed, make sure you understand how the system works and how it applies to you. This will help to avoid any problems with HMRC and ensure that you are making the most of your tax-deductible expenses.

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