Payment on Account
In this post I’m going to talk about Payment on Account as it might be unknown to some of the new businesses out there. Unfortunately, it might mean your tax bill is bigger than you were expecting.
What is it?
Most people know that if you complete a self assessment tax return then any tax you owe must be paid by 31st January following the end of the tax year. But did you know that tax is actually paid in advance in instalments on 31st January and 31st July? This is known as Payment on Account.
If a business is already trading at the start of the 2016 – 17 tax year then they will have paid a Payment on Account towards their 2016 – 17 tax bill on 31st January 2017 and another on 31st July 2017. On 31st January 2018 they make a balancing payment now they know the correct tax owed for 2017, plus the first Payment on Account for the 2017 – 18 tax year.
What’s the problem?
The problem comes in the first year of business (or the first profits). No Payments on Account have been paid towards the current tax year so the whole bill is owed plus an extra 50% for the first Payment on Account towards the next tax year.
Is everyone affected?
You do not have to make a Payment on Account if your last self assessment bill was less than £1000 or more than 80% of your tax liability from the previous year was collected at source, e.g. Pay as You Earn.
In the long run you are spreading out paying your tax bill which may be a good thing, but you need to plan for that first Payment on Account. I hope it is something you all have to worry about because it means you are making good profits!!
Regular bookkeeping will help you forecast your profits and therefore help you plan for your tax bill. Contact me for a free, no obligation consultation.