We’d like to think that most business owners are fully aware of things like Income Tax and Corporation Tax. However, there are other things to consider that you may not be aware of and payments on account is certainly one of them.
Payment on account is something that catches a lot of new business owners out. Unless you have some background in accounting or have done thorough research, you may not even have heard of it.
This can spell financial danger for newbie entrepreneurs. Not knowing about or being prepared for payments on account could leave you with empty pockets or even in debt.
As it’s Self Assessment season, no doubt quite a few people have already been caught unawares by it this year. It’s not a great start to the year is it?
So, we put together this quick guide on what payments on account are and whether you need to pay them.
What does payment on account mean?
Essentially it’s a way of spreading the cost of your tax bill over two payments rather than one at the end of the year. You’ll have to pay half your bill in January and half in July, by midnight the 31st for both payments.
This seems great at first glance. The looming January 31st deadline and the huge tax bill to go along with it is enough to make anyone succumb to the January Blues.
But there is some bad news unfortunately. When you start your business, your first payment on account will likely be a whopping tax bill.
Not only do you need to pay for your previous tax year, you also need to pay up an advance payment for the next.
This means that your tax bill is likely to be 50% more than you expected.
How does this work?
The tax you pay in your first year is divided by two. So you need to pay last year’s tax and an extra half of that on top for the current year.
The next payment is then due July 31st, which will be the remainder of the tax bill for the current year.
From then on, you’ll only pay an advance payment of half your expected bill in January, and the other half in July.
It’ll get easier, but the first payment is a bit of a killer, we have to admit.
What if your income changes?
Self-employment income naturally fluctuates, so the advance payments might not accurately reflect what half the amount of tax you owe is.
In this case, your remaining bill may be more or less than the first bill. The second bill is basically a balancing payment which will bring the tax owed up to date.
So if you earn less than the previous tax year, you’ll have a smaller bill in July. There is a form you can fill in to get HMRC to reduce your first advance payment if you know your earnings will be significantly lower than last year.
If you earn more, your advance payment may be less than half and the rest of this bill needs to be settled by the time the next payment is due. This new amount will then be applied to the following year. This means that it should balance out.
Do I have to submit payments on account?
In most cases yes. However, if your tax bill is less than £1,000 or at least 80% of you income is taxed at the source, e.g. through PAYE, then you won’t need to do it.
If those conditions don’t apply to you, then there’s no getting out of it.
However, if you know you will struggle or it seems impossible to get the funds together, you must let HMRC know as soon as you can. The penalties for late or missing payments can grow and grow. If you give them advanced warning, in most cases they will do what they can to help you.
Need help with your accounts?
If you need help with working out your tax responsibilities, you’ll benefit from getting in touch with an accountant. They can guide you through it all so you don’t have to worry about whether you’re liable to pay something or are exempt.
Grab a free quote from us and you’ll get low monthly fees and access to your own dedicated accountant.