One of the initial benefits you can avail after starting your work as a sole trader is that you don’t have to pay tax as the money starts coming into your business – unlike the PAYE system in which earnings of the employees get tax deducted at source. Suppose, you have started your business as a sole trader in October 2019, then you are not liable to pay tax till 31 January 2021, i.e. Self-Assessment deadline for the 2019/20 tax year.
Limited company directors are also entitled to submit a self-assessment tax return every year for which the tax has been deducted from their salary (they usually pay themselves) through PAYE. Limited Company directors will also need to declare all the income they earned from dividends through their own Company or other sources.
- What is Payment on Account?
- Delay in Payment on Account due to Coronavirus
- Late Payment Penalties
- Adjusting the Payment
What is Payment on Account?
“Payment on Account” is a system started by HMRC for those persons whose maximum amount of tax has been paid by them through Self-Assessment. This system will not apply to you if more than 80% of your income has been taxed through PAYE. Otherwise, you must make a Payment on Account if your Self-Assessment tax bill is more than £1000.
You will need to settle your Self-Assessment tax bill for 2019/20 year by midnight on 31 January 2021. In addition to it, you also need to contribute half of your tax bill amount as an advance tax towards the next year, i.e. 2020/21. Then, the other half of the tax bill of 2020/21 year will become due on 31 July 2021.
Also See: Tax Rates and Allowances for 2020/21
Delay in Payment on Account due to Coronavirus
As per the recent announcement made by Chancellor Rishi Sunak on 24 September 2020, an additional 12-month extension has been provided to benefit 11 Million Self-Assessment Taxpayers from HMRC with the help of “Time to Pay” self-serve facility. Payments that are deferred from July 2020 and which are due in January 2021, will now not need to be paid until January 2022.
Previously, the UK government announced that the due date for the second Self-Assessment payment on account, which was 31 July 2020 for the tax year 2019/20, could be deferred to 31 January 2021. However, it is still necessary for you to file your Self-Assessment tax return by the deadline of 31 January. It could be possible that you might have to face financial implications by availing the delay payment option and need to face challenges concerning Cash flow in the upcoming year. Still, you should avail this option and pay your Self-Assessment tax bill by 31 January 2021 as it will save you from paying a hefty amount in the form of increased cost in the future.
If your business is currently facing the situation of financial distress and owes any outstanding tax, it’s time that you should apply for ‘Time to Pay arrangement’. In ‘Time to Pay arrangement’, you get a pre-agreed, time-limited deferral period from HMRC to pay any outstanding tax you owe to them. In this time of Coronavirus pandemic, the UK government announced that they would be offering the ‘Time to pay’ arrangements for any tax dues to be paid by 31 January 2021.
Late Payment Penalties
Payment on Account is something new for those persons who have never been a part of the Self-Assessment system. Suppose you are expecting a bill of £10000, finding and paying an extra tax of £5000 as first payment on account towards next year might be impossible for you.
In case you missed or failed to pay your Self-Assessment tax bill by 31 January, you will be charged with interest charges on the outstanding amount.
Adjusting the Payment
As we know that the size of the Payment on Account entirely depends upon your previous year tax bill. HMRC also assumes that the taxpayer will continue to earn income at the same rate, and it is the reason that you need to pay roughly the same amount in the following year.
The most important question which comes in the mind of self-employed people – Whether they are able to reduce the “Payment on Account”? for which the answer is yes. It might be possible for you to reduce your payment on account if you are engaged in full time work, or most of your earnings are expected to be taxed at source, but you need to be very cautious while reducing the payment as you could end up paying less tax to HMRC as a result. Less tax to HMRC could lead to penalties and interest charges. After crossing the initial hurdle, payments on account simply spread your tax bill over the year and make it easy for you to plan or making a budget. Therefore, a piece of advice from an accounting expert is very much needed for choosing the best course of action.
Hence, it is recommended that you should file your tax return as early as you can to avoid any nasty surprises from HMRC, especially if you have just started your business or become self-employed.
How can DNS help?
DNS accountants always believe in supporting contractors, freelancers and self-employed persons. DNS Accountants, with over 15 years of experience, helped many of self-employed people in filing their self-assessment tax returns. We are having a team of expert certified accountants which will take of your self-assessment, just like we are doing for our clients from the last many years.
In case you are having any query or want specialist advice on ‘Payment on Account” or filing “Self-assessment tax return”, kindly call us on 03330886686, or you can also e-mail us at email@example.com