Self Assessment - Payments on account!

reedi

Hi all,

Ive been a freelance designer (sole trader) now for over 4 years now and so far all is well on the self employment front. My only one main area of hassle and worry is all this "payment on account" for a year in advance of tax when it comes the time to pay my dues in April and July.

I thought working for yourself was looked on favourably by the government but although I enjoy being my own boss and helping out companies with their creative stuff, I feel Im just working for the tax man and begrudge and often only just manage to hand over XYZ amount of tax due, PLUS what they want for the following year each time it's due.

I just rang the tax office (got the usual miserable sounding, unhelpful and lack of caring attitude from the person on the other end) and although I can apply to reduce my payments on account, she said I'd have to pay backdated interest on unpaid tax should when next years tax is due it works out I haven't paid enough (so yet more money to the tax man).

I know we all have to pay tax, but isn't this just rip-off Britain again?, the cost of living is high enough as it is and the taking of advanced tax doesn't really help so I guess what Im asking here is, am I the only one who hates this policy?, am I being ripped off?, is being self employed worth it?

Thanks

Andy

Elaine_Wilson

It depends what help you expected to receive being self employed.

You are being given interest-free credit on your tax contributions compared to an employed person. Remember, when you make your first interim payment in January you are only effectively paying for the period April to September of the previous year. And the figure is based on the last year's earnings so if your income has increased the extra tax is deferred until the following January.

An employee would have paid tax on April's earnings at the end of April, not the following January.

It sounds as though you are suffering from the psychological effect of paying six months tax in one go. Tax always seems a lot when it's paid in big chunks. Perhaps you need to set up a system whereby you transfer an amount each month into a savings account to cover the tax. Then you will be able to see the interest earned on the delayed payment of your tax.

hansoff

Elaine_Wilson wrote: »

It depends what help you expected to receive being self employed.

You are being given interest-free credit on your tax contributions compared to an employed person. Remember, when you make your first interim payment in January you are only effectively paying for the period April to September of the previous year. And the figure is based on the last year's earnings so if your income has increased the extra tax is deferred until the following January.

An employee would have paid tax on April's earnings at the end of April, not the following January.

It sounds as though you are suffering from the psychological effect of paying six months tax in one go. Tax always seems a lot when it's paid in big chunks. Perhaps you need to set up a system whereby you transfer an amount each month into a savings account to cover the tax. Then you will be able to see the interest earned on the delayed payment of your tax.

What a wonderfully accurate, concise and comprehensive reply Elaine. You are a national treasure.

Mikeyorks

reedi wrote: »

...the taking of advanced tax doesn't really help ....am I being ripped off ..

Not right on either score Andy. You're paying in arrears (unlike us poor mortals on PAYE) .... so you're not being ripped off either. But no need of a fuller explanation as Elaine is spot on.
And HMRC equally. If you reduce the payments on account below what you owed the previous year ... and get it wrong ... then you will be charged interest (reasonably - otherwise everyone on SA would be at it) on the shortfall.
But you wouldn't be paying it if the business wasn't doing OK;)

reedi

Ah I see, so yes I guess Im suffering because of the lump sum effect. Thanks Elaine, think I will set up the other account so the blows a bit softer....(still wouldnt hurt the Tax people to be more polite on the phone though!).

Thanks Mikeyorks and hansoff too.

jamesd

reedi, you might consider using the certificate of tax deposit option. It means paying money in advance but you get interest on it if you don't need it to pay a tax bill, while if you do need it to pay a bill, you won't pay interest that's backdated if you say take the payment out of the deposited money.

whatatwit

Hi Andy, when is your year end?

If like most small businesses, your year runs from 6th April to 5th April, then your best bet is usually to get your accounts in or, your SA return completed and liability calculated to be more precise as soon as possible after 6th April.
That way, you will know what your July payment should be and if you have underpaid on January's payment.
OK, I realise that if you hang on to submit your return, then you can wait until the following January to pay an extra due as a balancing charge, but you do have to put the money aside in order to pay this and not feel hard done by in January.

Elaine_Wilson

hansoff wrote: »

What a wonderfully accurate, concise and comprehensive reply Elaine. You are a national treasure.

Wow, , a lot of people think I ought to be buried but I've never been called a treasure before.

You've made my day.