Really confused by my tax self assessment

[whataboutbob]

I have actually written to HMRC but in the interim I thought I’d post here.
I have a public sector job where I earn about £40000 taxable pay. On top of that I own 2 rental properties which usually adds up to about £17000 income. Each year my tax calculation is worked out at a figure, say £2500, then they add 50% on top. Why do they charge for 150% of the tax owable? Clearly there’s something I have failed to understand. Thanks for any explanations.

Payment on account?

The extra 50% is a payment on account towards the following year.

For example, year 1 you owe £100, they then add on £50 so you pay £150. You then make a second payment on account in July of £50.

Year 2 you owe £110. You have already paid £100 (two payments on account) so you have effectively only got £10 left to pay. You then have this years payment on account of £55 (50% of £110) so only have to pay £65. Second payment of account of £55 due in July.

Year 3 you owe £120. You have already paid £110 (two payment on account) so you have effectively only got £10 left to pay. You then have this years payment on account of £60 (50% of £120) so only have to pay £70. Second payment on account of £60 due in July.

Etc etc

I hope that makes sense. I didnt quite believe it was true when I first heard about it but it is just HMRC's way to get you to pay tax ahead of time.

Yes, they call it a payment on account on the electronic form. But doesn’t that mean that effectively you are paying 150% of the tax owed each year? Aren’t they just massively boost your tax bill? Where does it stop? Do you ever get that excess tax paid back?

No it doesn't. You will pay 150% the first year, but the next year they take off what you've already paid in advance and you just pay 50% of the next year. Exactly as per the pp calculations.

Ok, but last year I paid 150% of my tax calculation and this year they are also demanding 150%.

You don’t pay excess tax. Read the above posts again.

Year 1 - You owe £100 tax You pay £100 plus £50 on account for the next year - Balance = -£50

Year 2 - You owe £100 tax minus the £50 you paid on account last year. You pay £50 tax plus £50 on account for the next year. Balance = -£50

Year 3 You stop trading part way through the year. You owe £50 tax. You apply to reduce your payment on account due to the fact you've stopped trading. You pay nothing. Balance = £0

Can you pay money/more money into your pension to max out your tax relief?

The payment on account goes into your tax account to offset against the following years tax. If your income is more or less the same year on year then the tax liability and payments on account will be more or less the same.

www.gov.uk/understand-self-assessment-bill/payments-on-account

Total tax bill for the year 2018/19 eg £3000
Paid £1500 on 31 July 2018
Paid £1500 on 31 January 2019
Total Tax bill for the year 2019/20 eg £4000
Paid £1500 on 31 July 2019
Paid £1500 on 31 January 2020
Total Tax bill for the year 2020/2021 eg £5000
Paid £2000 on 31 July 2020
Paid £2000 on 31 January 2021 PLUS the £1000 shortfall

Thanks everyone for patiently explaining this to me. I fear the HMRC calculations are correct then and that is indeed how much I owe. It’s just odd paying half a year in advance when income for that year won’t always be the same as the previous one . Was just checking because they do sometimes make mistakes and I didn’t want to be overpaying. I think part of the issue is I used to do tax returns for my dad when he owned the properties and as it was his sole income his tax liability was lower. Also, I took a 9 month career break when I first owned the properties so again my overall income was lower and I had less tax to pay in the rentals. So this years bill is a bit of a shock!
This year I made an overall big loss as I refurbished one of the properties entirely to the tune of over £30 000 and make a loss of about £15000. I hope therefore my tax calculation for 2020-2021 will reflect that.
Thanks again.

odd paying half a year in advance when income for that year won’t always be the same as the previous one .

Is what self employed people have to do about tax on earnings, even though their annual income can vary a lot too.

If you know that the next year's income will be lower, then there is a space where you can enter the new details and you will be taxed accordingly.

If you have a large loss this year (2020/21) you can do 2 things to help.

1. Apply to defer part of your payments on account, this is a box to complete on your 2019/20 tax return.

1. Prepare and file your 2020/21 tax return as soon as possible after 5 April 2021, and definately before 31 July 2021 when your 2nd payment on account is due - so that payment can be reduced if necessary in light of the actual tax due.

Another thing to bear in mind is that you aren't actually paying that much of it in advance.

E.g. 2020/21 starts on 6 April 2020, you make your 1st payment on account by 31 January 2021 (10 months into the year), your 2nd payment on account by 31 July 2021 (4 months after the year end) and your balancing payment by 31 January 2022 (10 months after the year end).

Compared to PAYE where you are paying tax on each tranche of income ad you earn it, the self assessment tax payment regime is actually pretty generous.

Are you not making your second payment on account in July too?

So each January you pay the balance of what was not covered by your payments on account plus a POA towards the next year. You don't pay it all again!

They set these calculations out for you showing your liability and payments. It's obvious there is no "excess".

I’ve never understood this

How can you pay on account, ie in advance, if you don’t have it?

Are your refurbishment costs actually tax deductible though or are they going to be treated as capital improvement for tax purposes (and therefore only deductible against any capital gain when the property is sold)?

You can't necessarily deduct all outgoing payments on a rental property from the income. It depends on the nature of the expense.

Maybe if you're struggling you should consider appointing an accountant or tax adviser? There are penalties for submitting incorrect returns.

This year I made an overall big loss as I refurbished one of the properties entirely to the tune of over £30 000 and make a loss of about £15000. I hope therefore my tax calculation for 2020-2021 will reflect that

OP you need to be careful submitting your self assessment, as only maintenance and repairs to a property are tax deductible. Improvements (and refurbishment is inevitably an improvement at that cost I would think), are not deductible for income tax purposes. You will see the relief, if any, when you sell and pay capital gains tax.

HMRC's example of maintenance vs improvement is replacing a laminate worktop. Another laminate would probably be maintenance, but granite would be an improvement.

Thanks for this.@ClaudiaWankleman that’s exactly what I did, replace laminate with granite. Also re decorated throughout. I also got a collapsing bathroom floor repaired and a total electricity re wire as the electrics were 40 years old. I repaired garden fence which was all broken, so I guess there will be a mix of improvement and maintenance and repairs.
@Chasingsquirrels thanks for the heads up re timely submission. I plan to be up and at my computer on the 6th of April 2021 to get this all done!

@user12636853357 re payment on account for this year, I must admit that’s still due! I didn’t understand and I didn’t pay. Something else to cough up 😕

I bloody hate payment on account! It makes no sense to me either. I mean, I sort of understand why HMRC ask for it, but it does seem unfair!

Yes, it makes me feel anxious that they’re taking money you don’t owe yet. And that you just have to trust that if your earnings are less in the next financial year, they will put that right (Eventually). And I don’t entirely trust that. I obviously don’t think HMRC are out to rob me, but I am sure they are under big pressure now to collect as much tax as possible and it’s not impossible mistakes will be made.

I know ☹️
My earnings for this financial year are more than 50% lower than last year, so paying so much on account now feels terrible!

I filled the bit in on the form so I'm not paying on account this year.