OT Tax Code and Accounting Periods

nxdmsandkaskdjaqd

I hope this is the right thread.

This is on behalf of my 22 year old son who finished university in the summer of 2014 and has now been in full time employment from February 2015. Prior to this he has been running a small graphics company resulting in the last 2 years him earning over his personal allowance and having to pay income tax.

During the first 2 months of his full time employment this year he was placed on an emergency tax code of OTM1 and this month an OT code, which I understand means that his personal tax allowance has been used up.

His business accounting period runs from the 1st January to 31 December of each year.

I think that I understand the situation, but wanted to check, so because of his business HMRC are assuming that he will use his personal tax code through his business, therefore have applied this OT code which will remain with him on subsequent payslips. Is this correct?

It’s unfortunate that his business accounts run calendar year, this was my fault when I help him set the business up whilst at school, in hindsight this was wrong and I think down the road is going to cause complications. I am not sure I have a question on this point, but are there any words of wisdom that might help me unravel this particular point and my concerns over his calendar accounting period and the Inland Revenue Tax year..

Many thanks.

zygurat789

nxdmsandkaskdjaqd wrote: »

I hope this is the right thread.

This is on behalf of my 22 year old son who finished university in the summer of 2014 and has now been in full time employment from February 2015. Prior to this he has been running a small graphics company resulting in the last 2 years him earning over his personal allowance and having to pay income tax.

During the first 2 months of his full time employment this year he was placed on an emergency tax code of OTM1 and this month an OT code, which I understand means that his personal tax allowance has been used up.

His business accounting period runs from the 1st January to 31 December of each year.

I think that I understand the situation, but wanted to check, so because of his business HMRC are assuming that he will use his personal tax code through his business, therefore have applied this OT code which will remain with him on subsequent payslips. Is this correct?

It’s unfortunate that his business accounts run calendar year, this was my fault when I help him set the business up whilst at school, in hindsight this was wrong and I think down the road is going to cause complications. I am not sure I have a question on this point, but are there any words of wisdom that might help me unravel this particular point and my concerns over his calendar accounting period and the Inland Revenue Tax year..

Many thanks.

The taxpayer has the right to say which income source the allowances should be applied to. If you choose the self employment then you pay tax sooner, if you choose the PAYE income then there is no large payment every six months.
Why do you think you made the wrong choise of year end? This can be changed.

nxdmsandkaskdjaqd

zygurat789 wrote: »

The taxpayer has the right to say which income source the allowances should be applied to. If you choose the self employment then you pay tax sooner, if you choose the PAYE income then there is no large payment every six months.
Why do you think you made the wrong choise of year end? This can be changed.

Thanks for that, yes that's an excellent point regarding where the personal allowance is used.

Regarding account period, it's just doesn't fit any more. It was fine whilst he was in education as he had just one revenue stream. I appreciate that it can be changed and we might have to do this.

zygurat789

nxdmsandkaskdjaqd wrote: »

Thanks for that, yes that's an excellent point regarding where the personal allowance is used.

Regarding account period, it's just doesn't fit any more. It was fine whilst he was in education as he had just one revenue stream. I appreciate that it can be changed and we might have to do this.

But why?
There are reasons for choosing a particular year end.
Again for delaying the tax due, or alternatively, for paying it and getting it out of the way.
I have never come across "It doesn't fit" Which year end are you thinking of?

nxdmsandkaskdjaqd

zygurat789 wrote: »

But why?
There are reasons for choosing a particular year end.
Again for delaying the tax due, or alternatively, for paying it and getting it out of the way.
I have never come across "It doesn't fit" Which year end are you thinking of?

So he has paid tax due on the business for the 1 Jan 14 to 31 Dec 14 and has forward payments to make latter this year.

My comment it "doesn't fit", is having two accounting periods (i) jan to Dec and (ii) Apr to Apr. In my mind it makes the whole tax situation more complicated.

zygurat789

nxdmsandkaskdjaqd wrote: »

So he has paid tax due on the business for the 1 Jan 14 to 31 Dec 14 and has forward payments to make latter this year.

My comment it "doesn't fit", is having two accounting periods (i) jan to Dec and (ii) Apr to Apr. In my mind it makes the whole tax situation more complicated.

Accounts year to 31 December 2014 is taxed as 2014/15, tax being payable, On account 31 January 2015 & 31 July 2015 with the final, balancing payment on 31 January 2016.
In the self employed section of the tax return you have to enter the figures for the accounts year, whichever 12 months that may be. It is no more complicated for one year than another, However, changing the accounting period is a totally different kettle of fish and you should seek professional advice on that.

nxdmsandkaskdjaqd

zygurat789 wrote: »

Accounts year to 31 December 2014 is taxed as 2014/15, tax being payable, On account 31 January 2015 & 31 July 2015 with the final, balancing payment on 31 January 2016.
In the self employed section of the tax return you have to enter the figures for the accounts year, whichever 12 months that may be. It is no more complicated for one year than another, However, changing the accounting period is a totally different kettle of fish and you should seek professional advice on that.

Thank you for your input on this, it has been most helpful. However, I am struggling with understanding how the taxation works with a different business account period verses HMRC tax year.

I thought the example (some elements are assumed) in the attached drawing might help in explaining where my confusion arises.

purdyoaten

zygurat is absolutely correct - there is no reason to change the 31st December year end. On the 2015/16 return you declare the profits for the accounting year 1st January 2015 to 31st December 2015. You also declare ANY OTHER income that arose IN THE TAX YEAR.

If you feel you must, the calculations are not for the amateur. Let's say you wanted to change the year end to March and this takes effect now.

You would have to declare profits for the period 1st January 2015 to 31st March 2016 on the 2015/16 return - a period of 15 months. From this you could deduct the overlap period (profits taxed twice) which occurred right at the start of the business (1st January to 5th April probably). This could be less than the period from 1st January 2016 to 31st March 2016 and there could be a higher tax bill as a result.

zygurat789

Simply, the year of assessment is the year in which the accounts year ends.
Hence year to 31/12/2014 is 2014/15.
Forget your confusions and start here

nxdmsandkaskdjaqd

zygurat789 wrote: »

Simply, the year of assessment is the year in which the accounts year ends.
Hence year to 31/12/2014 is 2014/15.
Forget your confusions and start here

Is your reply in the above in relation to the drawing that I done? If so, I am unable to see how you account for your Employment Income running April To April with your Business Income running Jan to Dec. And how do you deal with this in your tax return.

purdyoaten

I have just noticed that the business ceased February 2015? Is this the case? If so, when did it start and I should be able to tell you what accounting period to enter on the tax return for 2014/15.