Let’s face it: paying taxes isn’t the most exciting thing about running your own creative business. In fact, it just might be the part you dread the most. Good thing you only have to deal with paying income tax once a year when you complete your Self Assessment return, right?
Well, we hate to be the bearers of bad news . . .
Once your business crosses a certain threshold of success, you’ll actually be required to be paying taxes twice a year: once in January and once in July. These are called Payments on Account, and they can be a confusing (and frustrating) subject for lots of business owners, so let’s break them down:
What is a payment on account for self-assessment?
HMRC is a lot like us: they like to get the money they’re owed as soon as possible. With a typical Self Assessment return, you pay tax up to 10 months after the end of the tax year. To try and get the money they’re owed from “bigger earners” a bit faster, HMRC asks for payments on account.
In short, these are payments towards your next Self Assessment tax bill ahead of time. Whatever amount you’re being charged for payments on account, you’ll pay half of it on January 31st – in addition to whatever tax you owe for the previous year – and half on July 31st.
Who has to make payment on account?
You’re required to make Payments on Account if:
- Your last tax bill was more than £1,000
- Less than 80% of your tax is deducted at source, like through payroll
If this sounds like you, you’re one of the lucky business owners who get to pay tax twice a year!
Okay, we say this only a bit sarcastically. Payments on Account do mean your tax liability is spread throughout the year instead of one large lump sum, which can make planning and budgeting easier if you have the right foresight.
How much will I have to pay?
Payments on Account are based on your previous year’s tax bill. HMRC assumes that whatever taxable profit you made this year, you’ll make again (or more) the following year.
If, for example, you owe £2,000 for the 20/21 tax year, HMRC estimates you’ll owe £2,000 for the 21/22 tax year, and your Payments on Account will be two equal payments of £1,000. For the most up to date information on how you’ll make these payments, check out this page from HMRC.
Of course, this calculation isn’t always accurate. It doesn’t include things like student loan payments or capital gain tax and, as a business owner, you know that profits don’t always remain consistent year to year.
If your actual tax bill is more than your payments on account, you’ll need to make up the difference. If, on the other hand, your actual tax bill is less than the amount of your Payments on Account, you’ll be owed a repayment by HMRC.
What happens if I don’t pay it?
Like any tax bill, it’s important to pay the amount you owe on time to avoid additional fees. If you miss a Payment on Account deadline, you’ll need to pay both the original amount due plus accrued interest.
You also may have to pay additional penalty fees depending on how late your payment is. There are three late payment penalties on unpaid income tax, each equalling 5% of your unpaid tax. These penalties are applied after 30 days, 5 months, and 11 months past your income tax due date.
For example, if you owed £2,000 of unpaid income tax, you’d be charged a £100 penalty after 30 days, an additional £100 after 5 months, and a third £100 penalty at 11 months. These penalty fees are also subject to interest rates. As you can see, it doesn’t pay to procrastinate.
Can I change how much I have to pay?
You can ask HMRC to reduce your Payments on Account if there’s a basis to do so. For example, if your profits decreased or the amount of tax relief you’re entitled to increased. This can be done either online through Government Gateway or by post.
But be careful: if done incorrectly, you’ll be charged interest on the difference between HMRC’s original calculation and whatever you’ve requested to change your payments to.
If you’d like more guidance on paying taxes, claiming a reduction on your payments on account, or what Payments on Account can mean in general for your business, we’re here to help. Our mission at Raedan is to help remove obstacles and clear away the tiny headaches that drag down your creativity so you can focus on your bigger vision. To start, fill out this form to tell us more about yourself.
