Just found out about 'payments on account' of tax for next year and now not sure my business is viable :(

[maybenow]

So... it seems that in my first year of business i have to pay income tax + half of the same amount again on account for the following year. I didn't know this, despite reading up a lot on starting a business.

I was all set to siphon off 25% of all income into a savings account to pay my tax bill at the end of the year but now it seems i need to save 37.5%!!! In my very first year of business i am not sure i can live on what's left ... WHY do they do this to new businesses????? is there any way round it??? my first year is obviously going to be the hardest whatever happens... this seems to be almost making it impossible... it's a LOT more work i have to find to cover it and i'm scared now

I don't suppose anybody can offer any ray of hope??? I suppose this is just the way it is.

You can apply to reduce the payment on account - would call the HMRC helpline for more info.

No, you don't pay the payment on account until 31 January 2013 and this is supposed to be no more than half of your profit for 2012/13 (if it is more than that you can apply for a reduction as Meg says). You will have put aside 10 months worth of tax by then.

It is easiest to explain with some actual numbers and dates, if you don't want to give too much away, when did you start?

almost everything i've read says that you can only reduce it if you've got a good reason to believe your earnings will be less the next year. I don't, i hope mine will be more, my problem is finding the cash in year1 to pay up front for year2's tax.

can somebody check my timeline?

apr 2012 start self empolyed
apr 2013 end first tax year
jan 2014 pay tax on income from apr 2012-2013 AND half again to cover tax from apr 2013-2014
aug 2014 pay other half of apr 2013-2014

january 2015 work out wtf the actual figures are and if i've earned more in year 2 than year 1 i then pay the difference and half again for next year etc...

now, if i get pregnant i need to stop this awful chain reaction but i assume that'll be easy enough to do as that is genuine reason to believe my earnings will go down.

Grr... this makes me so angry... i was so naive thinking i could just save 25% of of my earnings and hand it over at the end of the year.. it's so much more bloody complicated than that.. think i really will need a tax adviser

cross posted with mranchovy but should provide the info asked for... i hope..

i guess what you're saying is that if i keep saving the 25% i should always have the money i need at the time i need it? is that right?? it's to do with the january vs. april dates isn't it?

Yes that's right. So in January 2014 you effectively pay tax (and Class 4 NI) on 18 months profits (Apr 2012-Mar 2013 plus half of Apr 2013-Mar 2014) but you have had 22 months (Apr 2012-Jan 2014) to save up for it.

If your profits are likely to be more than £15k a year you should (1) get an accountant and (2) consider incorporating.

Oh, if you aren't working at the moment and haven't earned more than about £5,000 this year it could well be worth starting your business today if you haven't already.

phew! sounds ok then. I will get an accountant i think, i am hoping to earn around 20k... (doing what i'm doing now earning 34k as an employee).. my outgoings are small though, it's essentially intellectual work so only basic office costs and small amount of travel costs to be deducted from income to give profit.

which answers your second post - i'm paye right now.

Also, with profits of up to £20k a year you only need to be putting away 18% of your profit for tax and Class 4 NI in 2012/13. For a more accurate estimate, take £7,950 off your profit and multiply by 29% (this only works for profit up to about £42k).

Thank you - so kind of you to give your time to answer me. I really appreciate it.

Is this obligatory now then? this paying on account?
The government are supposed to be helping small businesses, not screwing us to the wall.

how can you pay tax on profits if you haven't made that profit yet?
(especially when you haven't got a track record to help guess it)

almost makes me glad i've not made a profit!

Is this obligatory now then? this paying on account?
It has been for some time now, and replaced a similar system that was worse for the taxpayer.

how can you pay tax on profits if you haven't made that profit yet? confused (especially when you haven't got a track record to help guess it)
Look at the dates in my previous post - you don't pay anything until at least three months after you have made the profit.