Self Assessment

Should you defer your second payment on account?

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If you are self-employed, or have additional income on top of your salary from things such as a buy-to-let property, you need to complete a Self Assessment tax return each year, and then pay HMRC any additional tax due. If all of your income comes from employment and you pay your taxes through PAYE (Pay As You Earn) then you do not need to complete a tax return and the following does not apply to you.

For those that are new to the Self Assessment tax return process, payments on account are one of the most common stumbling blocks. Despite being introduced as an initiative to help taxpayers spread their tax payments, it often results in annual frustration and can actually harm your cash flow if you’re caught unaware.

That’s why, in response to the COVID-19 pandemic, HMRC announced that they would allow taxpayers to defer their second payment on account (that would have normally been due on 31st July 2020). It is hoped that this gives taxpayers the chance to prepare. But is that the right course of action? We’ve brought in Mike Parkes from GoSimpleTax to set the record straight.

What is a payment on account?

Payments on account are advance payments towards your next tax bill. They’re calculated based on the amount that you paid the previous year.

HMRC splits this amount into two, and places the deadline for payment six months apart from one another. For the 2019/20 tax year, the first was due by midnight on 31st January 2020, and the second would normally be made by midnight on the 31st July 2020.

This latter payment is what can now be deferred, as long as it is eventually paid by the 31st January 2021.

If you had a £5,000 tax bill for the 2018/19 tax year, for instance, you would need to make two £2,500 payments on account towards your 2019/20 tax bill.

But if your 2018/19 Self Assessment bill was less than £1,000 or if over 80% was deducted at source (such as employment), then you will not need to make a payment on account – you would simply need to pay any outstanding tax by the 31st January.

What are your options?

If you are required to make payments on account, you will still need to pay your second one. Although, as HMRC has offered taxpayers the opportunity to delay this, you can choose to make your second payment as late as the 31st January 2021, alongside the submission of your Self Assessment tax return.

HMRC will not charge any interest or penalties should you choose to do this. However, by delaying your second payment to January, you do run the risk of having to fulfil all your tax responsibilities at once. This could result in you having insufficient funds in place to cover all your tax liabilities.

Your therefore have three options:

Pay in accordance with the original July deadline

If you can afford to pay your tax bill as you would do normally, you should do. If anything, it creates a sense of ‘business as usual’ in an otherwise tumultuous time.

I appreciate that, for many, paying in July will harm their cash flow. However, it is my view that clearing debt where possible is more sustainable and allows January to mark the start of a new financial year – and a fresh start.

Reassess and reduce liability

If you’re doubtful that you can afford a second payment on account right now, calculate your 2019/20 tax liability before the 31st July 2020. This will confirm the actual amount to be paid in July 2020, January 2021 and July 2021, and give you clarity. To do this, you need to file your 2019/20 Self Assessment tax return early.

Filing early won’t mean that you have to pay your tax bill early, after all – but it does allow you to determine what your total tax bill will be ahead of time. From here, you can consider two key points:

  1. Does the July 2020 payment on account need to be deferred?
  2. Do the January 2021 and July 2021 payments on account (for the 2020/21 tax year) need reducing to reflect the impact that COVID-19 has had on them?

Defer to later in the year

Of course, there will be some cases that are unable or unwilling to pay anything towards their tax bill in July now that they can defer. In this instance, it’s important that they are reminded of the Self Assessment late penalties should they wish to push this all the way back to 31st January and be unable to make payment at that time.

Deferring could have an impact on cash flow in 2020/21. If you are also VAT-registered and have deferred your VAT payment, then it is worth noting that this also needs to be paid by 31st March 2021.

Ultimately, it falls to you to make the decision that best suits you. However, it is my view that, by planning your 2021/22 payments now, you will be in a much safer position.

About GoSimpleTax

With GoSimpleTax, you can get a clear picture of your obligations. All your income and expenses can be logged in an easy-to-understand format, and their software will highlight areas where you can potentially reduce your tax liability through tax relief.

Register for their free trial today and stay abreast of all the latest tax changes. When you’re ready to file your Self Assessment tax return, upgrade to their full service and submit straight to HMRC.

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Thursday, June 25th, 2020 Income Tax No Comments

None of the content on this website, including blog posts, comments, or responses to user comments, is offered as financial advice. Figures used are for illustrative purposes only.

Limited Company Tax Calculator added!

Over on our sister site Employed and Self Employed, we now have a Limited Company Tax Calculator. If you are self employed through a limited company (as many people, like IT contractors, can be), then your tax is worked out differently from if you are just plain-old self employed. The limited company pays you a salary, which is typically quite small, and the rest of the company’s profits are paid to you in dividends (after the company has paid corporation tax), which are taxed at different rates from other income. The following graph shows you a comparison of how much income you get to take home as self employed or with a limited company (click on the image for a larger version).

Limited Company vs Self Employed comparison

Click the image for a larger, interactive version

As you can see, in this example (with typical values entered), the limited company approach allows you to take home more of your income. However, this does come at a cost – more paperwork is required for limited companies, including registering with Companies House and having your books prepared by an accountant. Accountant’s fees might eat up a significant amount of the difference in take-home, so it might not be worth switching from one to another. If you’re interested in being self employed as a limited company, speak to an accountant to find out if it is right for you.

To start performing tax calculations, check out the limited company tax calculator over at Employed and Self Employed.

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Changes to Child Benefit

As you might have seen in the news, the government has introduced changes to who is eligible to receive Child Benefit, taking effect from 7th January 2013. If you or your partner earn over £50,000, the amount of Child Benefit you are eligible for will be reduced – and if one of you earns over £60,000 you will not be eligible to receive any Child Benefit. Those who are earning between £50,000 and £60,000 will have a choice to make before 7th January, since they can still keep some of the Child Benefit they are used to. You can either:

  1. Opt out of Child Benefit, and stop receiving it from 7th January 2012
  2. Choose to continue receiving Child Benefit, but pay a “High Income Charge” as an extra tax, effectively reducing their net Child Benefit. To do this, they must register for Self Assessment and complete a tax return each year

If you choose option 2, you will receive the same amount of Child Benefit as you currently do – but you will have to complete a tax return at the end of the tax year, and HMRC will levy an additional tax of some (or all) of the Child Benefit you received. This so-called “High Income Charge” is calculated as a proportion of where your total income comes between the £50,000 and £60,000 thresholds – e.g., if your income is £55,000, you will have to pay back 50% of the Child Benefit you receive. The income used is your “adjusted net income”, which is not simply your salary – you must add to this any additional income like interest paid on savings, and deduct eligible pension contributions. When you complete a tax return through Self Assessment, HMRC will work out your adjusted net income and the proportion of Child Benefit that you must repay. The High Income Charge will never be more than the Child Benefit you or your partner received. More information is available on HMRC’s High Income Child Benefit Charge page.

If you find yourself in the £50,000 – £60,000 income band, you have a limited amount of time to decide whether you are going to give up Child Benefit or register for Self Assessment (if you haven’t already) and pay the High Income Charge. To help you understand better how this will affect you, there is a government tool you can use to help decide what to do, which will guide you through the relevant points to consider.

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Wednesday, December 5th, 2012 Income Tax No Comments

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