If your self-assessment tax bill is much higher than expected, read on – this is for you.
Or, if you’ve just encountered the phrase “Payment on Account” and you aren’t sure what it’s all about, this is also for you.
Like many of us, HMRC prefers to have its money in advance in case traders go belly up. So, once you earn enough profit, HMRC gets you on a system of paying in advance.
31 January 2023
Pay the first half of your estimated tax bill for 2022-2023 – the calculation assumes you earn the same in 2022-2023 as you did in 2021-2023.
5 April 2023
Finish earning money for the 2022-2023 tax year.
6 April 2023
Begin earning money for the 2023-2024 tax year.
31 July 2023
Pay the second half of your estimated tax bill for 2022-2023.
31 January 2024
- Deadline to file your self-assessment tax return for 2022-2023.
- If you earned more in 2022-2023 than in 2021-2022, you’ll have to pay the extra at this point.
- If you earned less in 2022-2023 than in 2021-2022, the credit goes towards your payments due for 2023-2024.
- Pay the first half of your estimated tax bill for 2023-2024.
5 April 2024
Finish earning money for 2023-2024
6 April 2024
Begin earning money for 2024-2025
And so it continues, year after year.
When you retire, it looks like this:
Pay the first half of your estimated tax bill for your final tax year
Finish earning money for your final tax year
Pay the second half of your estimated tax bill for your last tax year
Deadline to file your final self-assessment tax return
Make a payment for the difference, if you earned more in your last tax year than the year before it
Get a refund if you earned less in your last tax year than the one before it.
So it all comes out in the wash at the end.
That point happens when your income tax + Class 4 NICs (National Insurance Contributions) total more than £1,000.
When does that happen? It depends on your exact circumstances, but as a ready reckoner ballpark figure for 2021-2022 and 2022-2023, it starts when you make around £15,700 profit.
So if your tax bill has jumped considerably this year, and you didn’t make that much extra profit, this may be why.
You’ll be familiar with paying in advance or after the fact from different suppliers:
Usually, you pay rent or mortgage in advance, at the beginning of the month, for the month ahead.
You could pay after the fact for online advertising, based on how many clicks or impressions your ad received.
When you pay in advance, it means you have credit that is used up over time. In the case of rent/mortgage, it’s used up through the month ahead. In the case of your tax bill, it’s used up when you file your next self-assessment tax return.
The difference between every other supplier in your life and HMRC is that the others tend to stick to one method – either you pay them in advance, or you pay them afterwards. HMRC is the only one I can think of that has you start on one of those and switch to the other.
I understand why HMRC probably does it: the very first tax bill to a new trader being that much higher could easily make them fold the business, and all governments have a vested interest in encouraging businesses to start and grow. (That is, they want that sweet, sweet business tax revenue.) Changing to payment in advance after you’ve made a certain amount of profit then insulates HMRC from uncollectable debt.
We can see why HMRC does it, but it’s not something we run across very often, so it takes a bit to get our head around what’s happening when we get that first extra-high tax bill.
Hopefully, this explanation makes the system less opaque for you. Understanding that HMRC is holding your money as a credit for you to use later may make it slightly less annoying.
Remember, you can file your return any time from 6 April onwards, but still don’t need to pay until 31 January. It gives you almost 10 months to save up for the bill.
If you’re not sure whether you owe anything:
- Sign in to your HMRC online account (by going to gov.uk and searching for “HMRC login”).
- View your latest Self Assessment return
- View Statements
That screen will show you payments you’ve already made and payments you need to make still.
Keeping on top of your bookkeeping through the year helps you have a better idea of what you’ll owe when.
Hi, I'm Sara-Jayne Slocombe, and my mission is to help UK-based businesses run better. Everything I do is aimed at giving you the confidence to run your business using the power of your numbers.
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