So 31st January has long passed which means most of you Self Employed have paid your tax bill. This is never going to be good but when Payments on Account kick in, it’s doubly rubbish and you’ll be currently saving to pay the 31st July bill. So why do some just pay in January and some have to pay in January and July? It is simple but always seems quite complicated when you start to explain how this works but here goes.
Firstly payments on account kick in when your tax due for the year is in excess of £1000. Each payment on account is for half your previous tax bill and the payments are due on 31st January and 31st July.
So for example, if your tax is £999 for the year ending 5th April 2014 that is how much you need to pay by 31st January 2015. No payments on account needed, simple.
However, if for the first time your tax bill for the year ending 5th April 2014 comes to £1000, you will not only have to pay the £1000 by 31st January 2015 but you will also have to pay £500 on account of the next tax year, so £1500 by 31st January 2015 then another £500 by 31st July 2015.
Then once your tax bill for the following tax year ending 5th April 2015 is calculated, and for example, it comes to £1200 due 31st January 2016, you have already paid £500 twice on account of this so only the balance of £200 is due but you also have to pay half of the £1200 on account of the following year so your payment for 31st January 2016 would be £200 + £600 with another £600 due by 31st July 2016.
Clear as mud!!!
Any tax overpaid in advance will be refunded with interest and if you know in advance that your next year’s tax bill will be lower, the payments on account can be reduced.
It’s always best to get your tax bill calculated as early as possible so if you do have a nasty bill, you have longer to save for it or if you have overpaid, you get your money back earlier.