Self-assessment confusion

kazzamunga

Hi - having just come off the phone after a conversation with an odious HMRC employee, I really feel like I'm going mad.

I have filed self-assessments every year since 2014. I have had different work situations in that time - there have been years where I have been solely self-employed, whereas in other years I have had PAYE jobs and paid extra tax on my self-employed earnings. So the figures have fluctuated a lot. But every year, without fail, what I have done is to file my return sometime in the year, and then make a payment in the January, for the previous year. On one particular occasion, I had a really large tax bill because all my work had been self-employed, and I had wanted to declare a lot to get a mortgage. On that year, I asked if I could split the payment and pay the balance a month later. So I paid once in January and once in February. Every other year, I just had the amount I needed to pay, paid it, and was done for another year.

This year, I have done all the right things - set aside 20% from each pay packet, etc, and I'm ready to pay the January bill now. Only my tax return says I need to pay on account for half of next year's tax payment in January as well. Before I have actually done my tax return. Umm, no? I have had this crop up on my account before, and I was told when I spoke to HMRC - say, two years ago - that I would not have to do that. I could just pay in January the year after, like I always do. This guy, however, said that he was looking at my account in front of him, and every year I have paid in advance on account, like they are asking me to do here. That is CATEGORICALLY ********cks. I just checked my bank accounts to reassure myself I'm not going mad.

So this is very confusing for me. Is there like an earning threshold above which the government imposes its estimates on you for your tax earnings in the tax year that is not yet complete?! How come this 'payment on account' thing has not cropped up every time I have done it, and how come previously I could just say I did not want to pay on account and that was fine, and now they are saying that I have to? I'm frustrated because here I am, ready to pay in advance of the January deadline, and now seemingly I have to find another wadge of money to pay in January anyway. Heaven forbid I should ever actually be able to set aside some money for myself and not the government.

Dazed_and_C0nfused

Payments on account are based on the liability of the prior year.  There is nothing unusual about them, they are related to Self Assessment, not self employment, and they are not payments in advance.  The first one would be payable on 31 January 2022, roughly three quarters of the way through the tax year they are for.

For example (in simplified terms) if you owe say £3,000 for 2020:21 you may also be required to pay £1,500 for 2021:22, half on 31 January 2022 and half on 31 July 2022.

If your total liability for 2021:22 was only say £2,000 then each of those POA for 2021:22 would be reduced to £1,000 and there would be nothing to pay for 2021:22 on 31 January 2023.

If your total liability for 2021:22 was say £4,000 then each of those POA would remain the same (£1,500 each) and there would be a Balancing Payment of £1,000 to pay for 2021:22 in January 2023.

There is nothing whatsoever to stop you paying whatever you want now.  Assuming you don't have anything to pay until January 2022 then it will just sit on your Self Assessment account as a credit until nearer to January when it will be allocated to a charge/charges becoming due in January.

If you think that the POA for 2021:22 will be more than you will owe for 2021:22 then you can make a claim to reduce them to whatever you think will be due.  For example if you think you will owe £500 in total then you would reduce each POA to £250.

kazzamunga

Ok but how is it that I have been doing this for 6 years and this would be the first time I have had to do this? I have had payments ranging from £400 to £7000, and I have never had to pay anything on account. 

I appreciate what you say about it being three quarters of the way through the year, but if I've been paying a year behind all this time, of course it's going to be a wrench to suddenly have to do that *and* pay upfront?!

[Deleted User]

You would not have had to make payments on account if the previous years bill was less than £1000. Anything above that and you would have in accordance with what HNRC said - this has been the case since 1997. 

Here is the guidance - as is common the wording is clumsy as the words ‘in advance’ are used. As Dazed has stated this is not the case.

https://www.gov.uk/understand-self-assessment-bill/payments-on-account

kazzamunga

Ok well I have just been 'illegally' not paying 'on account' for almost 7 years, then. And no one has ever chased me for more money or told me that that is what is required. Which seems extremely unlikely, given that this is HMRC we're talking about! On some occasions it was less than £1000, but I would say that was less than half the time. I've been chased by letter for £35 interest before now by HMRC. So if I had to change the way I was making payment, I would have expected to have heard about it!

It's really frustrating, because as far as I was concerned I was ahead of the game, and now I'm behind again. The idiot on the phone kept saying 'well if you were doing it as you said, you'd be paying a year behind the tax year every year'. Well, yes?! It's not PAYE, it's self-assessment? And how can you be asked to pay for self-assessment, having not yet self-assessed?! I don't like paying energy bills based on silly estimates, and it's the same for my tax. Government trying to claw back money, if you ask me. And self-employed people get hit for more than everyone else as it is.

Dazed_and_C0nfused

There is another rule with POA that means if you have paid 80% or more of your tax at source i.e. PAYE tax, then POA aren't required even if you owe more than £1,000.

You would have to review each calculation to check if that rule applies and was the reason no POA have previously been required.

[Deleted User]

Two further points to note. If the tax liability was ever £7000, ‘keeping back’ 20% would not be sufficient. 

Secondly - the important part of the bill is the balancing payment as this attracts a 5% surcharge if not paid by the end of February. 

Finally there remains the option to negotiate a payment plan with HMRC if financial difficulties arise.

Albermarle

Well, yes?! It's not PAYE, it's self-assessment? And how can you be asked to pay for self-assessment, having not yet self-assessed?!

Many PAYE employees also fill in self assessment forms . Often PAYE employees will overpay or underpay tax , because like you the full picture ( size of bonus for example ) is never known until April 5th .

So a PAYE employee will pay tax in 20/21 but not filling SA form until after the tax year finishes. 

kazzamunga

[Deleted User] said:

Two further points to note. If the tax liability was ever £7000, ‘keeping back’ 20% would not be sufficient. 

Secondly - the important part of the bill is the balancing payment as this attracts a 5% surcharge if not paid by the end of February. 

Finally there remains the option to negotiate a payment plan with HMRC if financial difficulties arise.

It was a few years ago - I think that probably included class 2 and 4 NI and my student loan. Yeah I agree, but that's by the by, as I would always do my calculation soon after April so I would know what I had to work towards for the following January.

Yes a payment plan that makes you feel like you've failed at life...never been on a payment plan in my life, so I'm loath to do it for an imaginary sum to pay in advance of my tax return.

Anyway, I'll have to suck it up and set aside the extra. I suppose once I've done it once, it'll make all the next tax payments easier. I really don't mind what the system is - if the government said I had to pay my tax with each new payment I received, I'd be fine with that. But here I am, 7 years in, being told that it doesn't work in the way that it has been working for me since 2014. Just seems a bit 1984ish to me - rewriting the news and burning the old newspapers. 

unholyangel

kazzamunga said:

[Deleted User] said:

Two further points to note. If the tax liability was ever £7000, ‘keeping back’ 20% would not be sufficient. 

Secondly - the important part of the bill is the balancing payment as this attracts a 5% surcharge if not paid by the end of February. 

Finally there remains the option to negotiate a payment plan with HMRC if financial difficulties arise.

It was a few years ago - I think that probably included class 2 and 4 NI and my student loan. Yeah I agree, but that's by the by, as I would always do my calculation soon after April so I would know what I had to work towards for the following January.

Yes a payment plan that makes you feel like you've failed at life...never been on a payment plan in my life, so I'm loath to do it for an imaginary sum to pay in advance of my tax return.

Anyway, I'll have to suck it up and set aside the extra. I suppose once I've done it once, it'll make all the next tax payments easier. I really don't mind what the system is - if the government said I had to pay my tax with each new payment I received, I'd be fine with that. But here I am, 7 years in, being told that it doesn't work in the way that it has been working for me since 2014. Just seems a bit 1984ish to me - rewriting the news and burning the old newspapers.  

I would advise it is better to set aside either a percentage or fixed amount from income as you earn it, rather than using the following years income to pay the tax bill from the previous year. The reason I would suggest this is for situations like covid, retirement, ill health that prevents you from working/means you have to take early retirement. In normal circumstances I might suggest holding it in a high interest bearing account (so by putting it away earlier, you'd end up having to pay less) but I don't think anyone is offering a good interest rate currently, due to all things covid. 

kazzamunga

Thanks, that *is* what I've been trying to do. I do set aside a percentage as I earn it. But the pattern I'm in, as I keep saying, is to pay for the previous tax year. I mean, there's been no year where I've had last year's tax and this year's tax set aside at the same time, because I'm not that rich. So the money I have been setting aside from this year's tax has been going toward's last year's tax. That does make sense, right? I don't really see that the issue here is my skills in saving! It's the vague and spurious self-assessment rules! It won't be an issue after January, because I will now have to set aside another couple of thousand to bring myself up to date, after which the money I set aside will go towards this year's tax. As I say, I don't have an issue with saving, or how to save. I have an issue with the fact that I have not been ASKED to save in this way until now. Yes I've whacked what I was going to pay now in my premium bonds - they're not having a penny of it until 3pm on 31st January.