Self employed tax question

[DragonsEye]

Is it right that when you pay your yearly tax bill you have to pay another 50% upfront for the following year?

Sort of but a little more complicated than that:

Say for example you started to be self employed in April 2006.

Tax Year 2006/7: Pay all the tax for that year on 31 Jan 2008.

Tax Year 2007/8: Pay 50% on account on 31 Jan 2008 and 50% on account on 31 July 2008. These payments on account are based on the previous year and on 31 Jan 2009 you pay any balance (or get any overpayment refunded).

Subsequent years follow this pattern - you pay half in the January of the tax year, half in July with balancing up in January after tax year.

This does often come as a shock to people when they start as the first bill can turn out to be large.

There is scope to reduce the payments on account if profits are declining and you don't make payments on account if the tax liability for the previous year is less than £500.

Hope this helps - not easy to explain!

waaaaa, tres confusing! But thank you. My dh has just received a rather large bill for jan 09 and we just havent put enough aside to pay it.

I dont really understand because I dont think we've earned enough to have to pay that amount but dh is too impatient (and grumpy) to explain. God, what do you do if you just cant pay it??

Has he just done his first tax return as self-employed then? Did he have help with the return?

It's not his first but he set up in Feb 06 and all previous bills have seemed reasonable. He has accountants which have estimated £5000 to be paid in July but then £32000 for Jan 09!

I dont understand how we've underestimated it so badly. I really dont know how we are going to pay it.

that would imply much higher profits in the year endng Feb 08 (if he has a feb y/e) than in previous years?

yes CS, profits up, but the tax seemed disproportionate.

Im still trying to understand roqueforts calculations

"Tax Year 2007/8: Pay 50% on account on 31 Jan 2008 and 50% on account on 31 July 2008. These payments on account are based on the previous year and on 31 Jan 2009 you pay any balance"

sorry to sound thick but if youve paid 50% in Jan 08, and 50% in July 08, what balance remains to be paid in Jan 09?

it's 50% of estimated income (based on the previous year). So if you've made more profit in the year than in the previous year, then there's extra to pay.
Conversely, if you've made less profit, then you get a refund.

so you actually have to pay tax on monies that you havent earned yet?

you have earned the money, it's from the current financial year, as it's asssumed that you'll be earning similar amounts this (current) year as you did the previous year. So half of this year's (estimated) tax is paid part way through the year, half is paid just after the end of the financial year, and any balance/refund is sorted out ten months after the year end (which is when the tax is actually due). You're paying "on account".

Riiiight. Ive got it. Jan 08 and July 08's tax bills were low because they were based on the previous years accounts. It seems like we are paying alot in Jan 09 because actually we underpaid before and now we are paying the outstanding balance.

Thank you. (You can see why dh got impatient! )

make your accountnats do a breakdown of what is outstanding tax and what is payment on account, as it does sound a lot.

OK, thanks SV, will do.

Looks to me like it would breakdown like this:

2007/8

£5,000 paid in Jan 08
£5,000 due in Jul 08
£18,000 due in Jan 09

£28,000 Total liability for 2007/8

£14,000 (half of £28,000) due on account for 2008/9 in Jan 09 which with £18k above gives the £32k due.

Check with your accountant

so in theory we should have another £14000 bill in July 09?

Thanks for this. I also have never before understood how it works, (despite being self-employed, ). Now I sort of do, .