August 18. 2017
As well as paying Income tax and NIC’s based on profits for the
financial year, self-employed individuals are required to make ‘payments on
account’ towards the next tax year.
If your total Income tax and NIC’s for the year is greater than
£1,000, in addition to your Income tax and NIC bill, you will be asked to make ‘payments
on account’ towards the next year. They
are payable in two equal instalments.
One by the end of January following the end of the tax year and one six
months later by the end of July.
How are they calculated? In simple terms, each of the two payments
on account are calculated as 50% of your total Income tax and NIC due for the
year just ended.
When your tax bill is calculated for the following year, the total
Income tax and NIC due is reduced by the sum of the two payments on account you
have made in the year. Consequently, if
your profits are exactly the same amount in that year you will have already
paid your total tax bill in advance. If
your profits are more or less than the previous year, this would result in a
balancing payment or a refund.
So why do these payments have to be made? Does it sound unfair? Not if you consider that unlike the employed
paying Income tax and NIC under PAYE, the self-employed have nine months after
the tax year ends in which to pay their Income tax and NIC bill. HMRC’s view is that by then, you will have
been earning towards that year so they want a cut of it before the tax year has
ended. It also keeps you up to date with
your payments and gives you a clearer indication of where you are with your tax
affairs.
Under certain circumstances, payments on account can be reduced or
completely removed. This should only be
done under guidance and advice from your tax adviser. Unfortunately, the ‘I cannot afford to pay
them’ reason to reduce/remove payments on account will not wash with HMRC!
