Just switching to self employed - queries on timings and Payments on Account

Rowedahead

Hello, Any pointers much appreciated:
1. I have been made redundant and on 1st February 2020 I start as self-employed. Gross pay is projected at £3,500 monthly. I estimate my monthly profit at approximately £2,940 (after deductible business expenses and allowances). The HMRC online calculator works out at approximately £562 monthly tax and national insurance combined (£6,751 per annum).
2. I am confused about
• the timings when I will need to pay tax and NI Class 2 and 4 on my self-employed income, and
• how this will be calculated, especially because my income will be less than half what it was compared to when I was on PAYE.
Questions:
a. When do I need to submit the self-employed tax return on my freelance income for February and March 2020?
b. When do I pay tax and NI on that freelance income for February and March 2020?
c. How and when will I be expected to make “payments on account” of tax and NI for self-employed income in my first year of trading (February and March 2020)? And then the second year of trading (April 2020 to March 2021?)
d. How do I persuade HMRC to be reasonable about calculating the required Payments on Account, where I am going to be on taxable self employed income of less than half what I was earning on PAYE?
Sorry that's quite a lot, but I'd be grateful for any help.
Many thanks:)

Dazed_and_confused

The HMRC online calculator works out at approximately £562 monthly tax and national insurance combined (£6,751 per annum).

What online calculator?

a. When do I need to submit the self-employed tax return on my freelance income for February and March 2020?

Never. You need to complete a Self Assessment return, on which you declare all your taxable income for the entire tax year. The return for the 2019:20 tax year needs to be filed by 31 January 2021. But providing you have registered with HMRC it can be filed anytime from 6 April 2020.

b. When do I pay tax and NI on that freelance income for February and March 2020?

Any tax due for 2019:20 will be payable on 31 January 2021. This is assuming you haven't had to file a return for 2018:19.

c. How and when will I be expected to make “payments on account” of tax and NI for self-employed income in my first year of trading (February and March 2020)?

You wont. Unless you have to file a return for 2018:19 for some reason and that return results in payments on account being established for 2019:20.

And then the second year of trading (April 2020 to March 2021?)

That will depend on the figures on your 2019:20 tax return. The need for payments on account are established by the tax due in the preceding year and if you owe less than £1,000 or more than 80% of your liability was paid at source (i.e. PAYE) then no payments on account are due for the following year.

d. How do I persuade HMRC to be reasonable about calculating the required Payments on Account, where I am going to be on taxable self employed income of less than half what I was earning on PAYE?

You don't. Payments on account are based on the facts, they are not something to be negotiated. From what you have posted it is entirely possible that no payments on account will be required until the 2021:22 tax year.

For example,
2019:20 return is the first one completed and this shows total liability of £30,000. But £25,500 has already been paid via PAYE so although the liability is greater than £1,000 no payments on account are required for 2020:21 as more than 80% of the Self Assessment liability was paid at source.

2020:21 return is filed and shows total liability of £8,160 with no tax being deducted at source. Payments on account for 2021:22 will be required for say £4,000 each payment on account (payable 31 January 2022 and 31 July 2022).

And no, these are not "advance" payments. In the example above by the time you were to make a payment on account for the 2021:22 tax year we would be 10 months through that tax year. Someone on PAYE earning enough to pay tax would most likely have paid 10/12ths of their total tax liability for 2021:22 by that point.

00ec25

you are asking for facts which you could look up yourself as to answer your questions correctly requires a lot of writing
https://www.gov.uk/working-for-yourself

a) at latest by 31 Jan 2021
https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed

b) by the due dates set out on the tax return
https://www.gov.uk/self-assessment-tax-returns/deadlines

c) when your tax owed > £1,000 you will enter PoA - it will show on your first tax return and will be based on 50% of the tax due on the self employment income for the tax year you are submitting. since that is the only info HMRC has to work with
https://www.gov.uk/understand-self-assessment-bill/payments-on-account

d) re-read c), then this:
https://www.simplybusiness.co.uk/knowledge/articles/2019/06/payment-on-account-what-it-is-and-how-to-pay/

Rowedahead

The online tax calculator I looked at was uk tax calculators (sorry new users can't post links apparently to discourage spammers)
I have been submitting self assessment tax returns whilst I am on PAYE.
My worry is that HMRC will require a POA from me based on my old PAYE income for the last 10 months, plus self employed income for the next 2 months, rather than POA based solely on the reduced self employed income.
Thanks again:

Rowedahead

I'm grateful for the comments and links 00ec25.

It seems reassuring and almost too sensible to be true (!?) where you say regarding my query at point c) "...when your tax owed > £1,000 you will enter PoA - it will show on your first tax return and will be based on 50% of the tax due on the self employment income for the tax year you are submitting. since that is the only info HMRC has to work with.."(link provided)

However, my self assessment return due before 31 January 2021 will include my first 10 months income as PAYE (April 2019 to January 2020), and the last 2 months on much reduced self employed income (February and March 2020).
I hope that HMRC base the POA required on the facts of my much reduced self employed income projected forward, rather than the facts of the previous higher PAYE income which will be declared on the self assessment return !!
Thanks again

Dazed_and_confused

The need for payments on account are based on your total liability, not just the tax due on an individual source of income.

If your 2019:20 return shows POA are due for 2020:21 then you have the option to reduce these if you think your 2020:21 liability will be less than than the POA.

Your 2019:20 tax calculation will include your PAYE income and any tax deducted so it may be that POA for 2020:21 are not required as you may have paid a significant amount (80%) of your tax liability for the year under PAYE.

TheCyclingProgrammer

As was mentioned above, even though your total tax liability for 19/20 will be above £1000 (as it will include your PAYE earnings), it’s likely that as more than 80% if it was already taxed at source you probably won’t be due to make any payments on account in 2021.

All you will owe is your balancing payment for 19/20 on Jan 31 2021 which should be around a grand based on the figures you posted.

On 31 Jan 2022 you will be due to pay your tax bill for 20/21 which will be your first full year of self employment plus 50% again as your first payment on account, and a second payment on account of the same amount on Jul 31 2022. If your total liability for 21/22 exceeds your 20/21 earnings then there will be a further balancing payment for the additional 21/22 tax on 31 Jan 23 - if you’ve earned less than the previous year then you will be due a rebate.