How not to pay tax for 2 tax years at one go

ceuribet

I am working as a freelance translator (working from home) and previously I did the tax return myself. But last year, my income increased, so I decided to have an accountant to do my tax return. My problem is when the accountant filed the tax in January, I was straight away charged with around £2000 for the income year 2012-2013 and over £1000 for this year (2013-2014). Both had to be paid on 31st of January. I will have to pay another £1000 later in July for 2013-2014. So, in January I paid more than £3000 in one go and since I am not a high-earner it has affected my cash flow badly and negatively. And I feel now that I have to set aside around £200 every month to be able to pay the other £1000 which will due in July.

When I filed the tax return myself, I never had to pay for two tax years in one go like this. Usually in January I only paid the past year tax (for example in January 2012 I only paid tax for 2010-2011, but not for 2011-2012. I only paid tax of 2011-2012 in January 2013). So, this is quite a shock for me that now I have to pay this much in one go. I have asked my accountant, but they said this is normal. I might be an ignorant, but I really don't know why when I filed the tax myself I didn't have to pay for 2 tax years in one go, but now I have an accountant I have to pay for 2 tax years.

Can anyone please explain why? And is there anyway I don't have to pay for 2 tax years in one go like this? Thank you!

WestonDave

The way the system works is via payments on account based on last year, and a catch up.

Suppose your total tax liability for 2012/13 was £2000. This all needs to be paid by 31/1/14 so if you haven't made payments on account from before it will be collected at 31/1. You then also need to make payments on account of 2013/14 - the first of which is payable on the 31/1/14 (i.e. before the tax year ends) and is normally half the previous year's liability. So this explains the extra £1000 on top of the £2000. In July you will pay another £1000. If your tax liability for 2013/14 is the same as for 2012/13 then at the end of the year you will have paid all of that, so no "catch up" payment, so you will simply pay the half liability on account again - i.e. £1000.

The problem is that because of this system, if your profits are rising, your tax liability will be rising, but you won't pay the balance until the January catch up. So lets say this year's tax liability is going to actually be £3000 in total, you will be £1000 short by next Jan, so will have to pay that, plus your payments on account will then be half the £3k, so your total will be £1000+ £1500.

The upside of this system is you hold onto the tax for longer - the downside is that if you haven't planned for it then it comes as a shock.

I'm not sure how you ever got away without making payments on account and paying it all in January - you probably should have had penalties etc levied so I'd possibly be thinking you got away with one there!

purdyoaten

But last year, my income increased

This is most likely the reason.

Broadly, if you total bill for the year is less than £1000 you do not have to make payments on account for the following year. I suspect that, for the first time, you have exceeded this threshold.

Let's say that your bills for the last few years are:

2008/09 £500
2009/10 £700
2010/11 £800
2011/12 £900
2012/13 £2000
2013/14 £2500

The payments due would be as follows:

2008/09 - amount due 31st January 2010 - £500. No payments on account for 2009/10 as less than £1000

2009/10 - amount due 31st January 2011 - £700 - POA as before

2010/11 - amount due 31st January 2012 - £800 - POA as before

2011/12 - amount due 31st January 2013 - £900 - POA as before

2012/13 - amount due 31st January 2014 - £2000. Payments on account for 2013/14 - £1000 31st January 2014 (same date) AND £1000 31st July 2014.

2013/14 - amount due £2500 31st January 2015 less payments on account made £2000 - balance payable £500. Payments on account for 2014/15 - £1250 31st January 2015 (same date) AND £1250 31st July 2015.

WestonDave

Ah yes I'd forgotten the £1000 limit on payments on account!

ceuribet

thank you WestonDave and purdyoaten, I guess the £1000 limit is the answer! Thank you! you have both really enlightened me!