income tax - payment on account?

[MacarenaFerreiro]

I work from home, very part time. Up until very recently I've never earned enough to pay income tax as my earnings are pretty much level with the personal allowance as it has increased over the years.

This year I've taken on more work and with two months still to go on the tax year I'm already £500 over the personal allowance. This is a good thing - I'm earning more! I know I'll pay class 2 as I always do. And class 4 NI on an extra wodge over the limit. And income tax on the bit between the personal allowance and my earnings (but at a slightly lesser rate as I'm in Scotland).

Plugged all the numbers into a calculator and it came up with a figure of around £1300. Fine. If that's what's due, that's what I'll have to pay.

Then it went on about payment on account for tax year 2019/20. What's that all about? Assuming it's a deposit/advance on any tax I might be due for the year after?

As any freelancer knows, predicting what you're going to earn year to year is impossible. I have had a good year by my standards. Next year might be crap and I earn £9k. Is payment on account compulsory, or can I just not make it, and carry on doing my returns as normal, paying what's due, when it's due? My "business" is very straightforward in that it's writing/reseach based. I have no costs to declare, no stock to buy, no overheads or depreciation. All earnings are profit. So I don't have an accountant, and it's not worth employing one.

You've got it about right. My understanding - based on reading, as I've only just got into the system and am still earning under all the thresholds - is that you can request payments on account to be reduced if you know your income will be lower. But if you underestimate it by too much there could be a penalty.

The thing to remember though is the timelines for all of this. The tax return for 17-18, and the payment of taxes, has just happened now. You already know enough about your income for 18-19 to be estimating your payments, that will be due in January 2020. At that point, you may also be asked to make a payment "on account" of the tax for the tax year 19-20 that will be nearly through. I believe the idea is that you pay half in January and half the next July, with a balancing payment due the January after when you've done your tax return.

If your income has stayed high, you just need to put aside something for the tax as you earn it, and the payments on account shouldn't be too onerous. If your income has dropped back close to the thresholds, you can declare that when doing the current year's tax return in order to not make payments on account. But definitely if you are asked to make them, you have to do something active rather than merely choosing not to pay them.

I hope that helps a bit!

I know it all evens out in the long run. But i'm not a massive earner by any definition and being asked to pay effectively 150% of tax due for one year is quite a bitter pill to swallow.

I think you have to pay it and then reclaim it back if you earnings are in fact lower the next year.It took me slightly by surprise the first year ,although I knew how it worked in theory, the actuality of paying 150% stung a bit.My income has increased gradually year on year which I suppose is theoretically how it is supposed to work,but not always the case.Check with HMRC?

You need to remember that if you were on PAYE you would have already paid it by that time; we get the luxury of paying the tax between 8 and 20 months AFTER we've earned the money it relates to. If that helps.

Payments on account are triggered when you owe over £1,000 (there is other criteria too, but if you are just self employed this is the case).

Remember you are paying your tax up to 10 months after the year end though, so you have plenty of time to save up for it.

So year ended 5 April 2019 you owe £1,300 + a payment on account of £650 - you won't pay this until 31 January 2020. With the second payment on account by 31 July 2020.

By the end of Jan, you're 10 months into the current tax year so should know pretty accurately what the full year will look like, so you can estimate the tax, and if less than the automatic POA, you can elect to reduce it. By the time the next is due in July, you're four months after the tax year, so again, you now know even more accurately your profit figures up to April 5, so if even less, you can make another election to reduce POA, or if more, you can reverse the previous POA election reduction.

You're still not paying in advance of anything - in fact, you're still paying after you've earned the profit - on average several months later than if you were employed and paid under PAYE.

I know, I know. I shouldn't be moaning and if I was PAYE the money would have already been flowing towards HMRC since April.

But still. It's a bit of a national sport moaning about tax.

Definitely

It will only be a pain this, the first, year as you pay c.150% of the tax you expected.

Next year it will even out.

It isn't something they explained well. Nothing about the tax changes is at all transparent. Except we can no longer use a spreadsheet !!!

The further complication to it all is that I'm in Scotland where they have mucked around with boundaries and have this "starter rate" of 19% instead of 20% for the first couple of grand you earn. most of the calculators are designed for the majority of self-emplyoed people who live elsewhere in the UK. And then there's my pension contributions....

I think the best tactic is to start my tax return in June this year rather than leaving it to December... then at least I'll know what's due by the end of January 2020.

And by this time next year, I'll have a good idea what my tax liability will be like for the following year too. That new laptop I just bought is definitely being taken off as a business expense though. And the business cards I bought.