Tax payments on account under self assessment
As we enter the new year the deadline for filing your 2015/16 tax return with HMRC is fast approaching. Any balancing tax due for 2015/16 and any 1st payment on account of 2016/17 is also due by 31 January 2017. How clear are you on what needs paying, when and why?
THE BASICS BEHIND THE DATES
As most taxpayers will know, the tax year runs from 6 April through to the following 5 April and as we’ve just mentioned, any balancing tax payable for the period is due to be paid to HMRC by 31 January following the end of a tax year. So, for 2015/16 this would be the period 6 April 2015 to 5 April 2016 with any balancing tax payable for 2015/6 due by 31 January 2017.
BUT WAIT! THERE’S MORE
Payments on account. Under self assessment you may then be required to make payments on account of the next tax year. In our example this will be on account of 2016/17. You’ll need to make payments on account of the next tax year if your tax bill is more than £1,000. But there is an exception in that you will not need to make the payments on account if you have already paid more than 80% of your tax liability at source (eg; through your PAYE code on employment income).
HOW MUCH AND WHEN?
If you are required to make payments on account, then there are 2 payments payable. Each payment is based on 50% of the previous year’s tax bill and they are due to be paid to HMRC by 31 January and 31 July. In our example above this would be 31 January 2017 and then 31 July 2017 which would then be used against your eventual tax bill for 2016/17 which would be due to be filed any paid by 31 January 2018.
Of course, if the payments you make on account of the next tax year end up to be higher than your tax bill, then HMRC will refund the difference.
REDUCING YOUR PAYMENTS ON ACCOUNT
Each of the payments on account are calculated based on the prior year income. Therefore if you feel your income or profits from business activities for the next tax year will be less than the prior year it is important to recognise this as early as possible. You can apply to HMRC to reduce your payments on account to more accurately reflect the level of income you feel will be reported. NOTE: Be careful when calculating how much to reduce your payments on account by as HMRC can charge you interest and apply a penalty if you end up paying too little on account, following your decision to reduce the payments.
LET’S LOOK AT AN EXAMPLE
Alice is a self-employed individual and her tax computation for the 2015/16 year shows that she owes tax of £6,000. In her 2014/15 previous year return she had made total payments on account for 2015/16 of £4,000 (£2,000 each) so there is balancing tax due for 2015/16 of £2,000 and this is due to be filed and paid by 31 January 2017. There are then 2 payments on account of 2016/17 due, these are based on 50% of the 2015/16 tax due so £3,000 each. The 1st payment on account is due by 31 January 2017 and the 2nd payment on account by 31 July 2017.
31 JANUARY – DON’T IGNORE IT
They say tax doesn’t have to be taxing, but we find that the payments on account system can often trip up a tax payer when it comes to budgeting for tax. We can help you prepare and file your personal tax computations before 31 January 2017 for your 2015/16 tax return. And we can even help with earlier years if you are late in filing these. Please take a minute to view our personal tax services – Self Assessment – and do not hesitate to get in touch if you wish to discuss anything in further detail.
Source: Indicator FL Memo, hmrc.gov.uk