balancing payments on self assessment, - how are they calculated?

bs0u0128

for example:

1st payment on account: £6000 in january
2nd payment on account: £6000 in july

then a balancing payment of 7 or 8000 also due in january?

what do these do, and whats the point of it, AND can you choose to not have them so you just pay what you owe?

Bean_Counter

By paying an estimate of your tax liability, it means that you are paying tax earlier to the tax man.

They would no doubt claim that you are paying tax more in line with the period when you made the profit.

You can only opt out at a low level of tax, which I am pretty sure you are well above.

So you are stuck with it along with everyone else (who is liable to UK tax.)

LittleWoman_3

bs0u0128 wrote: »

for example:

1st payment on account: £6000 in january
2nd payment on account: £6000 in july

then a balancing payment of 7 or 8000 also due in january?

what do these do, and whats the point of it, AND can you choose to not have them so you just pay what you owe?

Its just as Bean Counter says - but on these figures you will also have a 1st payment on account for the following year with the balancing payment of £10000 - so £17/18000 to pay in total. (Projected at 50% of the previous years total)

You can ask for them to be reduced, (you will have to provide reasons) but if you reduce them too far, and it turns out the payments should have been higher - they charge interest on difference between what you paid and the amount you should have paid.

Tallymanjohn

The reason the taxman gives for the 'on-account' payments is that you are essentially paying your taxes up to 18months in arrears (if you start your business in May 2006, you complete a tax return after April 2007 but you won't have to pay your tax bill until January 2008). The taxman doesn't like this lag so hence you have to pay the 'on-account' amount to get more in line with the income as you receive it.

Cute_'n'_Quirky

You cannot refuse to pay it either.

I had paid a huge tax bill in January 2005, with only the "on-account" amount still to pay. The huge tax bill was caused by a big difference in a Capital Allowance on my car and the writing down allowance. Therefore the on-account payment rose dramatically too.

By the July I had a summons to take me to Court.

I didn't actually 'owe' this money, it was only on-account.

prettyinpink7890_2

Payments on Account are based on your previous year's tax liability. So, for example in 2005/06 Joe Bloggs has a liability of £10,000 and he didn’t previously make Payments on Account.

On 31 January 2007 he would have to pay a Balancing Payment of £10,000 for 2005/06 (ie the difference between tax paid for that tax year - eg on PAYE etc - and the tax due).

As Joe’s large bill for 2005/06 came from profits due to self-employment, it would be assumed that this level of income would be sustained for 2006/07 resulting in a similar tax bill.

Rather than waiting until the tax year ends to collect the tax due (and therefore giving Joe an advantage over those on PAYE who pay tax within the tax year), Payments on Account are raised. These are based on the previous year's bill and paid on 31 January in the tax year in which the income is earned and 31 July after the end of the tax year. This means that Payments on Account for income earned in 2006/07 would be due on 31 January 2007 and 31 July 2007.

Each Payment on Account is calculated at 50% of the previous year’s bill. So, for Joe, this means on 31 January 2007 he will pay:
Balancing Payment for 2005/06 £10,000
1st Payment on Account for 2006/07 £ 5,000

On 31 July 2007 he will pay the 2nd Payment on Account for 2006/07 of £5,000.

When his 2006/07 Return is received and processed, the amount of tax due, say £12,000, will be compared with that paid (eg on account, via PAYE etc), £10,000 and his Payments on Account will be adjusted accordingly. So, for Joe this means on 31 January 2008 he will pay:
Balancing Payment for 2006/07 £2,000 (£12,000-£10,000)
1st Payment on Account for 2007/08 £6,000 (£12,000x50%)

On 31 July 2008 he will pay the 2nd Payment on Account for 2007/08 of £6,000.

This cycle will continue, until either Joe ceases self-employment or his income levels fall to the extent where Payments on Account are no longer required.

Joe can request to reduce his Payments on Account if he believes that his liability for the following year will be less than the year they are based on. However, he would need to make an accurate estimate as if, when the Return comes in, the Payments on Account have been reduced too far then the difference between the lower of what HMRC originally set/should have been due and Joe’s estimate will be liable to interest as an overdue payment.

The Tax Calculation Guide issued with the Self Assessment Return does provide some information on Payments on Account. Also, you can call HMRC’s Helpline on 0845 9000 444. Alternatively, HMRC have Business Advisors who offer free workshops on Self-Employment and Self-Assessment. See http://www.hmrc.gov.uk/bst/index.htm for more details.

Apologies for the length of the post. Hope this helps.