Deducting tax from monthly self-employed income and tax payments on account

ashirus

I'm self employed and need to make tax payments on account (i.e. that HMRC demands based on the most recently submitted SA tax return - half the annual tax by 31 Jan of the current tax year, and the 2nd half by 31 July of the following tax year).

1. Does the UC system automatically deduct tax when I submit my earnings each month, or do I need to add the taxes I've paid as expenses?

2. If it automatically deducts tax, what rate does it assume and how does it factor in Personal Allowance (for instance in my case my self-employed earnings are entirely taxed at 20% the PA is used up elsewhere*).

3. And if I need to manually add taxes as expenses, then I don't understand how that's works with payments on account? I don't have to pay tax for S-E earnings this month until 31 Jan 2025. (I often pay late and swallow the interest, so right now I'm paying off (late) in random ammounts depending on my cashflow for the payments on account for tax year 23-24!)

I'm very confused, have I missed something obvious?

thanks
Ashi

*  from earnings from capital that are exempt from declaring on UC due to managed migration, but taxed as normal - don't ask!

Spoonie_Turtle

As far as I understand, for self-employment on UC you have to report income at the end if the assessment period in which you actually receive it and report expenses at the end of the assessment period in which you actually pay them.

NedS

When completing your self employment income and expenses each month on UC, there is a specific box that asks how much tax you have paid in that month. You should enter the amount you have actually paid to HMRC in that month, and any amount paid will be deducted from your income that month when calculating your earnings for UC.

Do not include or deduct income tax in your general expenses as this would be to include it twice.

The UC system does not assume any rate - you simply enter the amount of tax (in pounds and pence) that you have actually paid in that month. If you are paying your tax in two payments per year, for 10 months of the year you would enter that you've paid no tax in that month, and then in the other 2 months where you've actually made a payment to HMRC, you would enter the actual amount paid.

ashirus

NedS said:

When completing your self employment income and expenses each month on UC, there is a specific box that asks how much tax you have paid in that month. You should enter the amount you have actually paid to HMRC in that month, and any amount paid will be deducted from your income that month when calculating your earnings for UC.

Do not include or deduct income tax in your general expenses as this would be to include it twice.

The UC system does not assume any rate - you simply enter the amount of tax (in pounds and pence) that you have actually paid in that month. If you are paying your tax in two payments per year, for 10 months of the year you would enter that you've paid no tax in that month, and then in the other 2 months where you've actually made a payment to HMRC, you would enter the actual amount paid.

Ok thanks. Does it matter that the tax that I'm paying on account is for the previous tax year, which is a period before I even claimed UC (I'm a new claimant)? So right now I'll be paying thousands for the 23-24 tax year as a lump sum and then no tax for many months. Also, will that tax be counted as a large loss that will rolled forward for future months (in the same way as if I had a huge trading expense it can count as loss for future assessment periods)?

huckster

UC for Self Employment income and expenses is on 'cash in and cash out' basis. So if you pay tax to HMRC during UC assessment period, you include it. Does not mater which tax period it relates to.

NedS

huckster said:

UC for Self Employment income and expenses is on 'cash in and cash out' basis. So if you pay tax to HMRC during UC assessment period, you include it. Does not mater which tax period it relates to.

As @huckster says, income and expenses for UC is on a simple cash in, cash out basis.

So if you've paid a bill in the month (regardless of what it was for and when it relates to), you include it. Same with any income/payments received - you include it in the month the money was received, regardless of when the work may have been done.

ashirus

NedS said:

huckster said:

UC for Self Employment income and expenses is on 'cash in and cash out' basis. So if you pay tax to HMRC during UC assessment period, you include it. Does not mater which tax period it relates to.

As @huckster says, income and expenses for UC is on a simple cash in, cash out basis.

So if you've paid a bill in the month (regardless of what it was for and when it relates to), you include it. Same with any income/payments received - you include it in the month the money was received, regardless of when the work may have been done.

Ok. But does tax that's more than my income carry forward as a loss/expense (i.e. reduce take-home SE pay) for the next assessment period?

If not, then it would seem advantageous to pay my tax in monthly instalments, instead of paying only before 31 Jan & 31 July advance payments deadlines (or in my current case where I'm behind with my advance payments and getting charged interest, it's still worth paying slowly month-by-month and take the the hit of extra interest), in order to reduce my income for UC purposes!?

8dayweek

I’m presuming you’ve switched from Tax Credits and are in the Start Up Period for the first 12 months…? So if that’s the case I would be looking at trying to stabilise your income / outgoings somewhat as large losses being carried forwards aren’t going to particularly advantageous once the MIF is applied. 

ashirus

8dayweek said:

I’m presuming you’ve switched from Tax Credits and are in the Start Up Period for the first 12 months…? So if that’s the case I would be looking at trying to stabilise your income / outgoings somewhat as large losses being carried forwards aren’t going to particularly advantageous once the MIF is applied. 

You presume correctly but actually due to having capital assets I won't be entitled to UC after 12 months anyway ...!

8dayweek

Ah yes, I didn’t consider that aspect - so yes, paying that tax and carrying forward losses may well be more favourable for the time being. 

Also, as I understand it you may not strictly no longer be entitled to UC after an exact 12 months - I believe it’s technically 12x AP’s so if you’ve had any £0 UC Awards they don’t count.