self assessment payment on account

Insequence

Myself and my wife own property and so the income tax is done by self assessment. When the the self assessment statement is received there is a demand for tax on account for the following year assuming you are going to make the same income for the following year as you did this!!. We have always filled in SA303 to nullify this and that has been accepted. However this year they have backdated the on account tax due taken from the actual income from this year and charged interest. How can this be done. ie how can I pay now for next years income when I have no idea how much income I will make. Is there something i've missed or have the rules secretly been changed? Thankyou in advance for any insight

Nearlyold

Form SA303 is for when the tax payer has genuine cause to believe that their income will be lower in the following tax year, not just because you don't fancy paying an amount on account.When you say you have used SA303 to nullify this if you mean you have asked for the payment on account to be reduced to nil, then they may consider your use of SA303 is inappropriate because your income has not gone down in subsequent years if this has happened more than once. In any event you have paid interest because your payment on account was less than required.

Its difficult to see why you would have "no idea" what your income in following years would be.

grey_gym_sock

the idea is that you only apply to reduce/eliminate your payments on account if you will owe less tax in the next tax year, and don't want to overpay (and get it repaid later). so if your tax bill will rise or stay the same, you're supposed to make the payments on account as requested (unless you find it worthwhile to borrow from HMRC at whatever rate of interest they're charging). if you tax bill will be lower, you can at least reduce your payments on account, though it can be tricky to work out how much it's safe to reduce them without paying interest. i'm pretty sure that, providing you've paid 90% of the tax due, you won't be charged interest, which gives a little margin for error.

MDMD

Insequence wrote: »

How can this be done. ie how can I pay now for next years income when I have no idea how much income I will make.

Is there something i've missed or have the rules secretly been changed? Thankyou in advance for any insight

The POAs are due on 31 Jan during the year (so you will have an idea what the income will be up to that point) and 31 July after the year has ended (by which time the income has been received in full)

It has always been the taxpayer's responsibility to ensure they are reducing the payments only if it is appropriate.

booksurr

Insequence wrote: »

How can this be done. ie how can I pay now for next years income when I have no idea how much income I will make.

"next" is the single most frequent misunderstanding re POA

you are not paying next year's tax on account. You are paying half of the current year's tax on 31 Jan, when you are 10 months into the current tax year to which it relates. The remaining 50% is then due on the following 31 July, when you are 3 months after the end of the tax year to which it relates.

If your business does not earn at least 50% of its income by month 10 of the tax year you have a strange business.

compare that to an employee on PAYE who pays all they tax as it arises. In comparison, you get to pay it long after you have earned at least most of the income you will get.

[Deleted User]

booksurr wrote: »

"next" is the single most frequent misunderstanding re POA

you are not paying next year's tax on account. You are paying half of the current's years tax on 31 Jan when you are 10 months into the current tax year. The remaining 50% is then due on the following 31 July when you are 3 months after the end of the tax year to which it relates.

If your business does not earn at least 50% of its income by month 10 of the tax year you have a strange business.

compare that to an employee on PAYE who pays all they tax as it arises. You get to pay it long after you have earned at least most of the income you will get.

Excellent summary. Moreover, the op should consider himself very fortunate not to be in receipt of a penalty for 'a fraudulent and negligent' claim. This is not uncommon.

http://www.hmrc.gov.uk/manuals/emmanual/em4660.htm

chrismac1

I think such a penalty would be very harsh. As an accountant, I am constantly explaining the payment on account system to clients and in my view it is bonkers. By comparison, I NEVER have to explain the corporation tax system to clients other than "This is what you'll be paying 9 months after your year-end."

The hardest part of the self-assessment system is when people are hit with 18 months' of tax an NI all on one day, the first time they go above the starting point for payments on account.

[Deleted User]

I agree chrismac - it would be very harsh - only ever came across it once (c£12000 POA reduced to NIL).

But if everyone did it ...........?

TheCyclingProgrammer

If you put aside the tax on your income as you earn it, then you should never be "hit" with a demand for 18 months tax in one go and have a problem paying it - you should have the tax for the whole previous year and the tax for the current year up to that point (22 months in total) set aside.

Unless of course you've genuinely earned less in the current year in which case you can legitimately reduce them.

I agree though that people find themselves in this situation due to a lack of understanding of how payments on account work as pointed out above.