Statements are arriving in the post and payments on account of 18/19 tax are due at 31 July. What are they and how are they calculated?
If you pay your tax under self-assessment – you will probably have to make “payments on account” of your tax bill at 2 stages during the year -31 Jan and 31 July. They are just that – a “part payment” of your anticipated tax bill for the year and are calculated based on your tax bill for last year.
An example is the easiest way to explain the calculation:
You started your business in May 2016, prepared your accounts and calculated your tax bill for 16/17 to be £3,000. This was due for payment at 31 Jan 2018. But you also had to pay a payment on account of your next year’s (17/18) tax bill – and this was automatically calculated at 50% of the previous year – so £1,500. So actually at 31 Jan 18 you had to pay £4500. You may have just paid this at the time, thought it was a lot, but not really grasped what it was for.
The second payment on account for 17/18 is due by the end of July and again is 50% of last year’s bill – so another £,1500.
So by now – you have paid £3,000 on account of your 17/18 tax bill – even though, if you have not yet filed your tax return, you don’t actually know how much your final bill will be.
If your profits in Year 2 have gone up – and when you do your accounts and file your tax return, your tax bill for 17/18 is worked out to be £5,000, then you have already paid £3,000 of it during the year – so you only owe a further £2,000 at 31 January 2019. But, the process is repeated – so at 31 January 19 you will owe £2,000 for this year – and your first payment on account of 18/19, calculated as before at 50% of the current year bill (£2,500) – so £4,500 in total. You then owe at 31 July 2019 your second payment on account of 17/18 – another £2,500.
This is all fine if your profits have gone up. If you are in the scenario where profits are lower than the year before, then you will have overpaid in the year with your 2 payments on account and you will be due a refund for that year.
In the example above, if your tax bill for 17/18 worked out to be £2,400, then because you have paid £3,000 during the year, then you have overpaid £600. But, taking into account your first payment on account for 18/19 which will be 50% of £2400 = £1200, you still owe £1200 – £600 = £600 at 31 Jan 19!
Confused?? Who said tax wasn’t taxing!
If you know your profits are going to be lower in the next year, perhaps because you are doing less hours or lost a key client, then you can apply to reduce the payments on account that are going to make – to avoid overpaying in the first place. Cashflow is crucial to a small business, so you don’t want to give the taxman anything that is not really his!
Getting on with your tax return for the year now will also give you certainty about your tax bill and how much you should be paying. Why wait til January if you think you have overpaid and may be due a refund?
For more information or help with your tax return for the year, please contact Rosie Forsyth.