10 Sep What is payment on account for the self-employed?
Anyone who is self-employed knows that accounting and tax are very important considerations. When it comes to tax, all self-employed people need to complete a self-assessment return each year for HMRC. This tells the Government what you earned, how much profit you made and enables them to calculate how much tax you should pay.
One thing that some self-employed people might notice is the need to make tax payments on account. But what does this mean?
What is payment on account for tax?
In simple terms, this refers to twice yearly tax payments that HMRC think you need to make in relation to the upcoming year’s tax costs. This is different from the one payment you make at the end of January each year if you do not need to pay on account.
The official reason is that it helps people spread the cost of their tax bill and makes it more manageable. If you have to make payments on account, you would pay one instalment on 31st January and the second on 31st July. It is important to remember to keep money back for the July payment if you do not normally have to do this.
How do payments on account work?
These payments are based on your tax bill from the previous year. This means that HMRC is effectively guessing what your future income might be, based on past figures. It also means that you are making advance payments towards your yearly bill, rather than paying in arrears for the previous year each January.
Although it should help the self-employed spread their tax costs in theory, this does not always work out. The need to make balancing payments from the previous year plus the first payment on account can lead to a higher than expected tax bill in January.
Payment on account help with SQK Accountancy
If you are based in Manchester and need help understanding payment on account for the self-employed, get in touch with us today. Our expert team of accountants can help you not only grasp how it works but also help you plan for it and even complete your self-assessment tax return. Call us on 0161 706 0444 today for more help.