Many self-employed workers will face a tax demand this January without realising that they must pay not only the tax due for the last financial year to April 5, 2019 – but also a payment on account* for the current year to April 5, 2020. This can lead to unexpected cash outflow that was not planned for. Here I give an example and offer practical advice on how to tackle this issue.
* a payment on account is an estimated payment made in advance for the tax and NI due on your profits for the current tax year
Stick with me as this sounds complicated (but is not!).....
Once you are registered for self-employment (see when and how to register below) you will need to pay tax and National Insurance (NI) each January and July.
In January you will pay 1) the balance owed for last tax year plus 2) the 1st payment on account for the current tax year (which is 50% of the last years actual amount).
In July you will need to pay the 2nd payment on account (50% of last years amount)
So, if this is your first year as self-employed you will need to pay 150% of the last year liability in the coming January!
Using HMRC’s example:
Your bill for the 2018 to 2019 tax year is £3,000. You made 2 payments on account last year of £900 each (£1,800 in total).
The total tax to pay by midnight on 31 January 2020 is £2,700. This includes:
· your ‘balancing payment’ of £1,200 for the 2018 to 2019 tax year (£3,000 minus £1,800)
· the first payment on account of £1,500 (half your 2018 to 2019 tax bill) towards your 2019 to 2020 tax bill
You have to pay your second payment on account of £1,500 by midnight on 31 July 2020.
If your tax bill for the 2019 to 2020 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2021 (my add: plus the payment on account for the current year)
If you owe less than the payments made you will receive a repayment from HMRC.
The practical approach to this problem....
A practical approach to this cash flow challenge could be as follows:
· calculate what you estimate to be your earnings for the previous and current tax year
· use a simple online calculator to understand the tax and NI due for both years (eg https://www.stepchange.org/debt-info/self-employed-income-calculator.aspx)
· calculate the payments for each January and July over the next 2 years
· Put aside the required monthly amount – in a savings account of your choosing, earning interest
· Use this savings account to fund the tax and NI payments as they become due
Let us know if you need free help with this calculation - we are here to help!
If you are in financial difficulty as a result of this situation
These payments can be unexpected and cause financial difficulty – if this is the only significant debt you have consider calling HMRC to explain the situation and negotiate a payment plan. Make sure you have prepared a detailed budget so that you can prove how much you are able to afford as a monthly repayment. HMRC are willing to accept payments on account in most cases, especially where you have prepared your case in advance.
If you also have other significant debts, consider seeking advice from a debt charity such as Citizens Advice (where advice is free, confidential, independent and impartial https://www.citizensadvice.org.uk/). They will advise you on how best to proceed taking into account all the facts of your personal situation.
Registering as self employed
One reason many self-employed workers are initially caught out by this unintentional trap is that they have not realised they need to register as self-employed.
The rules setting out who needs to register (and when) are on HMRC’s site and I summarise the main points below.
If you are deemed to be self-employed in the previous tax year (the last ending April 5th, 2019) you must register by October 5th, 2019 (the sooner you do this the better now the date has passed).
Essentially you will to need to register as self-employed if you;
1. meet the definition of self employed (see below)
2. are trading (See below) and
3. have revenue of over £1,000 per tax year (April 6th to following April 5th)
You are likely to be self-employed if you;
- run your business for yourself and take responsibility for its success or failure
- have several customers at the same time
- can decide how, where and when you do your work
- can hire other people at your own expense to help you or to do the work for you
- provide the main items of equipment to do your work
- are responsible for finishing any unsatisfactory work in your own time
- charge an agreed fixed price for your work
- sell goods or services to make a profit
Trading includes the following:
· sell regularly to make a profit
· make items to sell for profit
· sell online, at car boot sales or through classified adverts on a regular basis
· earn commission from selling goods for other people
· are paid for a service you provide
More details can be found here: