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Guide To Self-Assessment Payment On Account

self-assessment payment on account

Self assessment payment on account is a system that means self-employed people in the UK have to make advance tax payments based on their previous years earnings. 

The payments are an estimate of the tax owed for the first half of the following tax year and are paid in two instalments; by January 31st and by April 30th. This payment on account system is designed to help self employed people spread out their tax bills instead of paying them all at once. 

Understanding self-assessment payment of taxes is essential for a self-employed person. Unlike traditional employees, self-employed people calculate and pay their own taxes. They file self-assessment returns containing an estimate of their taxable income and deductions. The payment on account is usually for the first half of the following tax year. 

This article is a guide to self-assessment payment on account. We evaluate the eligibility requirements and discuss the process of paying tax owed to HMRC when self employed.

What does Payment on Account Mean?

Payment on account is the estimate of the total tax you are eligible to pay and the advance payments made to settle this. This amount is calculated on your taxable income for the previous year’s returns with a payment deadline within the first half of the following year. Hence, keeping proper records of all transactions is important to help a smooth assessment process.

HMRC requires a bi-annual payment of taxes with the first instalment deadline of 31st January. The second payment for the year must be done before April 30th. Take note of these deadlines to avoid sanctions or penalties from HMRC.

A good piece of advice is to start your self-assessment early enough. Completing the self-assessment before the due date minimises the chances of errors. HMRC also accepts tax payments even before the deadline.

Who is Eligible for Payment On Account?

Every self-employed person is eligible for payment on account except for charity organisations or non-profit establishments. They are not mandated to pay but might voluntarily make payments on account to avoid future liabilities.

Business owners who manage a limited company are also eligible for personal payment on account. They have the liberty to use the business account for that since there is an existing provision to make payments on account for others.

Self-employed individuals can also choose to pay taxes throughout the year instead of one large sum. The process for setting up this type of payment is to register for self-assessment online. You will have the option to pay by debit or through direct debit

What is the Purpose of Payment On Account?

The payment on account taxation method was introduced in 1990 to assist companies and self-employed individuals to spread their taxes over the year instead of paying annually. The previous setup had an annual deadline of January 31st which was financially challenging for the small business owners.

For example, a self-employed carpenter with most of the big projects coming up in the summer months and very little income in the summer. The carpenter will likely experience cash flow issues with the initial setup of annual payments.

The payment on account system has significantly changed since the 1990 adjustment and HMRC now automatically sends a reminder to businesses. The message typically contains details of overdue instalments or notifications for those who mistakenly overpaid taxes. This does not indicate that businesses should not monitor their tax payment deadlines. It only serves as a way of reminding business owners.

How to Pay HMRC

You can complete the payment on account for your business in different ways. The most common method is Direct Debit – a payment gateway that can be easily set up on the GOV.UK website. An alternative is to pay using a debit card or a personal tax account.

Businesses that decide to pay online will get an email from HMRC containing a secured link to the payment page. HMRC encourages business owners to pay attention to their emails since late payments attract penalties. Individuals who prefer the Direct Debit payment should set up the platform before the deadline approaches. This is to avoid issues that might cause late payments.

How are NICs Paid in Payment on Account?

National Insurance Contributions (NICs) are part of the payment on account made by self-employed individuals. The total NIC is calculated from your taxable income for the previous year.

The payment approach is similar to tax payments since it is collected in two instalments. The NIC payment deadline is January 31st for the first amount and April 30th for the second instalment. More information on the National Insurance Contributions (NICs) is available on the GOV.UK website.

An Example of Payment on Account

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

Imagine you earned a taxable income of £12,000 for the previous year as a self-employed entrepreneur. The calculation for your NIC payment will be £240 in national insurance contributions and £240 in income tax for the present financial year.

Remember that National Insurance Contributions are paid in two instalments. The first payment on account will be £480 (50% of £960) which represents your total NIC for the January 31st deadline. Similarly, the payment on account for the second deadline of April 30th is £480.

Let’s now imagine that your taxable income for the current year is £15,000. The higher income means an increase in your expected National Insurance Contributions. Hence, your NIC goes up to £300 and your income tax payment is now £450. That means the first payment on account will be £900 (60% of £1500) for the first deadline of January 31st. Similarly, the second payment on account will be £600 due by the second deadline of April 30th.

The above illustrations prove how the second payment on account is usually lower than the first payment when there is an increase in the taxable income. This happens because the payments are only an estimation of what you will owe at the end of the financial year.

How to Reduce Payments on Account

It is possible to create a surplus in your tax payments, when the following year’s income is lower than the one that the tax on account estimates are based on. If this is the case, you should contact HMRC to reduce your payment on account.

You will require a “self-assessment payment on account reduction request” form to complete this process. The form is available on the GOV.UK website and must be returned to HMRC after you complete the filling out. HMRC reassesses the payments and notify you of the status of your request.

There are also other deductibles you can claim against your taxable income. These include expenses such as travel, office costs and professional fees. The GOV.UK website contains a comprehensive list of deductible expenses.

What to Do if You Overpay

Paying more than the correct tax is a mistake that anyone can make. The best solution when such happens is to contact HMRC and request a refund of the excess amount. HMRC reviews the situation and will approve a refund to be paid to your bank account within 30 days.

Although a delay over an agreed refund is unusual, you are eligible to message HMRC if the promised 30-day refund time elapses without payment. You can ask them about the status of your refund request.

What to Do if You Underpay

An underpaid tax issue must be resolved immediately to avoid penalties from HMRC. You should calculate the outstanding amount and make the payment through the business account or even your personal one.

If an issue occurs with the payment on account, we advise you to return to HMRC to make arrangements for a payment plan. It is very important to observe your tax payment process and explain any challenges to HMRC before it escalates. They might charge interest or penalties if you miss payment schedules. You might also be eligible to use an excess amount overpaid in the previous year to settle your outstanding debt.

Registering as Self-Employed with HMRC

It is recommended for those starting a new business to register as self-employed with HMRC as soon as possible. This will ensure you are registered for self assessment and can make the appropriate payments needed for income tax and National Insurance Contributions (NICs).

The HMRC website has an online registration platform for self-employed. The page is easy to navigate and the registration process is simplified. There is also a guide available for download to business owners who have multiple questions.

The main responsibility of registering the business as a self-employed entity is that of the business owner. It does not matter whether the business is actually managed through another person’s company.

Filling in Your Self-Assessment Tax Forms

Completing the self-assessment tax return form becomes mandatory immediately after you register as self-employed under HMRC. Self-assessment is a document that summarises your income and expenditure for the annual financial year. It also helps to determine the amount of tax payment overdue.

You can obtain and complete the form online through the GOV.UK website. Early submissions are encouraged especially since there is a deadline for filing out tax returns. Late payments might attract a penalty.

The process of filing out the self-assessment return is to declare every income from self-employment. The form should also contain income from other sources like investments or rental properties. Additional details to include are expenses such as travel costs or office costs.

HMRC has helplines that you can contact for assistance with the self-assessment tax return. You can contact them if confused about the taxation process.

The Importance of Financial Transparency

Transparency is an important value for every self-employed person when managing finances. It involves keeping a proper record of all the income and expenses for that period that the send assessment covers. Having easy access to your transaction documents helps while filing the self-assessment. There is also a minimised risk for error since records are accurate and completion of tax return forms is before the deadline.

The other beneficial aspect of transparency as a self-employed is gaining the trust of HMRC. This is possible through a clean track record of early tax payments with HMRC. You should also update them about essential changes within the business.

All of these factors help HMRC to trust you when a problem or complaint arises. Besides, the tax regulations require that you keep accurate financial records for a minimum of 6 years before considering their disposal. You just also trash unwanted documents completely so that the unauthorised personnel do not have it.

Other Considerations

Running a business as a self-employed requires knowledge of certain areas. The first one is the importance of VAT registration for businesses with turnover that exceeds £85,000.

There is also the need to be aware of the available insurance policies and the best ones for your business. Choosing an insurance plan depends on the industry you work in. For example, an employer’s liability insurance is necessary for any construction company.

Knowing when to seek financial assistance is the last thing to consider. Do not hesitate to consult an accountant or financial advisor if you are unsure about any business process. Talking to financial experts ensures your compliance with relevant tax regulations. It also eases your ability to optimise the use of every resource committed to you.

Following the above tips prevents you from having problems with HMRC and other government organisations. Understand you can also contact HMRC for guidance before reaching out to accountants or tax advisors

The Benefits of Self-Employment

Check out the different reasons to consider starting a business as a self-employed individual in the UK.

  • You enjoy complete control over your working hours. There is the liberty to choose when to work and how long to do so.
  • Enjoy working without restrictions on who to employ. You have the right to make any decision that can grow your business.
  • You are eligible to claim deductions against your taxable income to reduce the overall tax bill.
  • Self-employment offers higher flexible working conditions compared to traditional employment.

The decision to start your own business is an excellent idea in the UK.

Final Thoughts

In summary, self-assessment payment on account is an important part of staying tax compliant for self-employed people in the UK. By understanding the system’s eligibility, payment deadlines and calculation methods, you can make sure accounts are submitted on time, penalties are avoided and the right amount of tax is paid.

Self-assessment payment on account is a helpful taxation method for many successful self-employed in the UK. It allows a wider spread of your tax bill to ease the process of calculating your liable taxes for the year.

Every self-employed individual must understand how the system works. It involves keeping proper records of essential income and expenses of your business. This helps to avoid compliance issues with HMRC and identify any unclaimed tax-deductible expenses.

HMRC uses the self-assessment form to assess how much tax you owe. Note that inconsistencies or late filing of tax return forms might attract a fine.



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