Category: Self Assessment

payment on account money

What Is A Payment On Account?

Posted on | by Jade Donno


What Is A Payment On Account? Understanding the UK Tax System

A common source of confusion in the world of taxes, especially for those new to self-employment in the UK, is the ‘Payment on Account‘ system. With this post, we aim to demystify this concept for you in simple and easy-to-understand terms.

What Is A Payment On Account?

A ‘Payment on Account‘ is a tax payment made twice a year by self-employed people in the UK to spread the cost of the year’s tax. It’s a method used by HM Revenue and Customs (HMRC) to collect Income Tax and Class 4 National Insurance Contributions if you’re self-employed.

Why Do We Have Payments On Account?

These payments are essentially a way for the tax system to keep up with our fast-paced, modern world. Instead of waiting for the end of the tax year to pay all your tax in one go, Payments on Account split the bill into two smaller, more manageable amounts. This system helps prevent taxpayers from falling into significant tax debt.

When Are Payments On Account Made?

Payments on Account are made twice a year – on 31st January and 31st July. The first payment includes any unpaid tax from the previous tax year. The second payment acts as a ‘payment on account’ towards your next tax bill.

How Are Payments On Account Calculated?

Each Payment on Account is calculated as 50% of your previous tax year’s Income Tax and Class 4 National Insurance bill. These payments include a projection of your next year’s earnings, so they assume that you will earn a similar amount to what you did in the previous year. If your income significantly changes from one year to another, you can request to reduce your Payments on Account.

What About The July 31st Payment On Account?

The second Payment on Account, due by 31st July, is exactly the same as the first one paid in January. The total of your two Payments on Account is then deducted from your final tax bill for the next tax year. If your Payments on Account total more than your final tax bill, HMRC will repay the difference.

A Real-World Example of Payment on Account

Let’s say you’re a self-employed graphic designer, and your tax bill for the 2022/23 tax year came to £10,000. This would be due on 31st January 2024. However, in addition to this, you would also have to make your first Payment on Account towards the 2023/24 tax year. This would be 50% of your last tax bill, so £5,000.

Therefore, on 31st January 2024, you would actually pay £15,000 in total (£10,000 for tax year 2022/23 and £5,000 as your first Payment on Account for tax year 2023/24).

The second Payment on Account for the 2023/24 tax year (another £5,000) would then be due by 31st July 2024.

When you complete your 2023/24 tax return, if you find out that your actual bill for that year is £11,000, you’ve already paid £10,000 through your Payments on Account. This means you only need to pay the additional £1,000 by 31st January 2025. But remember, on this same date, you’ll also need to make your first Payment on Account for the 2024/25 tax year, which would be £5,500 (50% of the £11,000 bill for the 2023/24 tax year).

This example demonstrates how the Payment on Account system works in a realistic scenario. It ensures that your tax payments are spread throughout the year, making it easier to manage your cash flow as a self-employed individual.

Key Takeaways

Navigating the UK tax system can be challenging, but understanding the Payment on Account system can make your tax life easier. Remember these key points:

  1. Payments on Account spread the cost of the year’s tax into two payments.
  2. Payments are due on 31st January and 31st July.
  3. Each payment is calculated as 50% of your previous year’s tax bill.
  4. If your income fluctuates significantly, you can request to adjust your Payments on Account.
Key take aways

In conclusion, a Payment on Account is a proactive method implemented by the UK tax system to ensure that self-employed individuals can manage their tax bills more effectively.

As always, if you’re uncertain about any aspect of your tax situation, it is highly advisable to consult with a tax professional. Happy tax planning!

Marriage Allowance

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As we are in the middle of wedding season, it’s worth reminding everyone about marriage allowance. This extra bit of tax relief could be especially helpful to people now during the cost of living crisis.

What is marriage allowance?

Marriage allowance lets you transfer 10% of your unused personal tax allowance to your husband, wife, or civil partner. This will then reduce their tax bill by that amount. It could be worth up to £252 a year!

Am I eligible?

To be eligible to marriage allowance you need to be;

  • Married or in a civil partnership
  • one partner earning below the personal tax threshold of £12,570 per year
  • The other partner earning below the higher rate tax threshold of £50,000 per year

Unfortunately you can’t claim marriage allowance if you are only co-habiting and not married or in a civil partnership.

How do I claim marriage allowance?

If you are a client of ours, mention that you would like to apply for marriage allowance when we complete your tax return. We can then help you sort this out.

You can also apply yourself by phoning the income tax helpline on 0300 200 3300 or by applying online. You will need your partner’s national insurance number for the claim.

There are some online firms that will charge you a commission for claiming through them, our advice is to stay away from these and to either claim yourself by contacting HMRC or through your accountant. We do not charge our clients extra for this. This will ensure you get 100% of what you are owed!

Can I backdate my claim?

When applying for marriage allowance you can backdate your claim to 5th April 2018! So if you have been eligible for marriage allowance since then, these tax years will be included in your claim and you could receive more money back.

If you are married and not already taking advantage of the marriage allowance then what are you waiting for! Make sure you apply to receive your tax refund.

Payments on account

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If you complete a tax return you may have to pay your tax twice a year. This sounds like it should be bad, but it can be a helpful way of spreading your payments throughout the year.

What are payments on account?

Payments on account are made twice a year and are payments that you make towards your next tax bill. It is a way of bringing the tax collection closer in line with those who pay their tax monthly through PAYE.

Who has to pay?

If the tax liability on your last submitted tax return was over £1000 then you will automatically be set up for payments on account.

When do I have to pay?

You pay twice a year with payment deadlines on January 31st and July 31st however you can pay before these deadlines.

How is it calculated?

HMRC will use your previous tax bill to estimate how much tax it thinks you will be paying next year. It will then half this amount and charge you this in January and July, so in the following January you only have to pay what is left over, if any, and potentially the next payment on account. If you have overpaid, you will receive a refund, or if completing your tax return close to the deadline it will be deducted from the next payment on account.

Can you reduce how much you pay?

If you think your taxable income will reduce for the following year you are able to apply to reduce your payments on account.  They can be reduced through your tax return or via an HMRC online account by either your agent or yourself.  Payments on account cannot be reduced by too much as if your tax liability is higher than the reduced amounts when your actual tax return for the year is complete HMRC will charge interest for the underpayments and potentially penalties.

If you have collated your information for the year prior to the July second payment on account deadline the filing of the actual tax return can replace the estimated tax due if the tax liability for the year is lower than the prior year.

New to self assessment? – watch out

If you are new to self assessment or have never paid payments on account before it’s worth putting money aside throughout the year so that you don’t get caught out.  This is because the first time you become part of the payment on account regime you could have to pay 150% of the tax liability in January.  This would be 100% of the tax from the prior tax return and 50% again for the following tax return. This first experience can feel like a shock, but it will make the next payment in the following January easier.  This is because you would have already paid 100% of the prior year’s tax to deduct from the total.

How to pay

Simply log in to your government gateway and follow the instructions. Alternatively you can pay by phone, bank transfer or a number of other different way. The details of this will be on the letter you receive from HMRC, or on the HMRC payment guidance online.

We hope this helps clear up some of the questions regarding payments on account. Your government gateway account will always show your upcoming payments so we really do recommend setting one up. If you have any other questions regarding payments on account just give us a call and we will be happy to help.

Why sole traders need a separate bank account

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If you are just about to become a sole trader, or have been one for a while, you might be wondering whether it is worth getting a separate bank account for your business. There is no legal requirement for sole traders to have a separate bank account for their business unlike Limited Companies which are required to do so. This is because HMRC views Limited Companies and the Directors as separate legal entities, whereas sole traders and their businesses are viewed as the same. Therefore a Limited Company is required to keep its bank accounts separate from the personal accounts of the directors. For more information about the differences between these two business structures read our blog.

We usually recommend that all of our sole trader clients get a separate bank account for their business. Here are some of our reasons:

1) It makes your accounts more accurate

Having a separate bank account for your business income and expenses has the obvious advantage of being able to keep any other income and private expenses separate. This will stop any chance that they could become mixed up or confused which will in turn ensure that your bookkeeping and accounts are accurate.

2) It stops you missing anything

Similarly, if all of your business expenses are in one account then you know you will not miss anything. It can be very time consuming to go through your personal account and pick out the transactions that relate to your business, so with a separate account you (or your bookkeeper) will not have to do this!

3) It helps to keep your numbers up to date

If you have your accounts separate and your bookkeeping up to date then you will have a better overview of how your business is performing.

With a personal account, you may not be able to get as clear a view of what your numbers are which could lead to making incorrect business decisions.

4) It makes HMRC inspections easier

In the event that you get an inspection from HMRC, the first thing they will look at is your business account. This means that you won’t have to hand over your personal bank statements to them in the first instance. This process is likely to be a lot more straightforward if HMRC only have one bank account to look through.

5) It makes bookkeeping in Xero easier

We can set your Xero up so that it has a bank feed running to your sole trade bank account. This will mean that we won’t see your personal transactions or need you to send in bank statements for any other account. This could also save you money as our bookkeeping service includes up to 50 transactions per month. Using a personal account is likely to put you over this!

We recommend…

Some banks may charge a monthly fee for a business bank account. You don’t necessarily need to have a specific business bank account set up, however some banks do specifiy in their terms and conditions that you cannot use a personal account for “business use”.

Some banks however do specific bank accounts for sole traders, and don’t charge a monthly fee! We particularly like this one from Starling Bank https://www.starlingbank.com/sole-trader-bank-account/

(We are not affiliated with Starling Bank)

As you can see, it makes so much sense to keep a separate bank account for your sole trade business. It will save you & your bookkeeper time and hassle and make sure that you don’t include or miss anything important from your accounts.

Yellow and pink zig zag

Can anyone get a tax enquiry?

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Each year HM Revenue & Customs (HMRC) undertake an enormous number of tax enquiries into individuals and businesses to check they have paid the right amount of tax. Since 2010 HMRC have strengthened their approach to enquiry work by using wider powers and sophisticated software and consequently a record £36.9 billion of additional tax revenue in 2019/20 up £2.4 billion on the previous year.

Moving forwards we expect to see an even greater increase in the number of tax enquiries as HMRC look to revoke the enormous £350bn government spend through the Covid-19 pandemic, as well as ensuring that measures put in place to support the economy through this period have been utilised correctly by taxpayers.

Tax enquiries can last for months, even years and defending you against HMRC’s detailed questions requires specific expertise and can be time consuming and costly. Indeed the cost of dealing with an enquiry can amount to thousands of pounds, even if no extra tax is payable.

But no need to panic…. 

All of our 1 Accounts monthly fixed fee services cover the additional professional costs of handling tax enquiries and compliance checks this is through our Tax Fee Protection Service. This is so our clients never have to worry that they will get a huge unexpected bill if HMRC decide to investigate.

As an additional benefit this protection also provides our clients with complementary telephone access to employment, health & safety and general legal advisors, including support from employers with any adjustments made in response to the Covid-19 pandemic.

Calendar and alarm clock

When do I need to send my Tax Return Information to my accountant?

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Your self-assessment tax return is the document that is needed to calculate how much tax you owe personally. This return includes your dividends, employment income, rental income etc. One way to ‘stress out’ your accountant is to send them your tax return information in January. However, many people don’t understand why January is so stressful for accounting firms. Therefore we wanted to explain why sending in your information before January is so important.

Important dates explained

The tax year runs from April (of the prior year) to April (of the current year). For example, if we send you a request after April in 2020 for your self-assessment tax return information, it will be relating to information from April 2019 to April 2020. So the start and the end of the tax year.

The deadline to complete the return and pay any tax will be the following January, so in this case the 31st of January 2021. This gives you 9 months to get the return submitted and tax paid from the end of the tax year.

For anyone who has to pay a payment on account, this will be due the following July, so in this case the 31st of July 2021.

self-assessment timeline

The way we work

At 1 Accounts we use a system called Karbon to request self-assessment tax return information. At the end of the tax year on the 6th of April, we send out an automatic email requesting all the information we require to complete the return. We then send an automatic reminder email once a month for five months to those who haven’t uploaded the information. If you still haven’t sent in any information after this, you will get chaser emails from one of the team.

If you haven’t used our Karbon system before, it is nice and straight forward. All you have to do is click ‘manage checklist’ on the email.

Karbon checklist

This will then direct you to create a pin number (make sure it is memorable). If you forget your pin, just click on the ‘forgotten your PIN?’ hyperlink and follow the steps.

Pin number

Once you are in, you will be able to see a checklist where you can comment and upload the information we have requested, or ask any questions. These comments come through to the team like an email.

Once you have completed a task we ask you to tick it off. The open tasks are what triggers the automatic reminders and so ticking them off will stop them.

If none of the information requests apply to you, we still need you to write N/A in the comments so we know it doesn’t apply.

Once you have completed your checklist and ticked off the tasks, please just log out or close the window. Your progress will be saved and we will be notified

For anyone sending us information after the 15th of December, there is no guarantee we will be able to complete the return on time.

So why Is January so stressful for accountants?

With January being the deadline for self-assessment tax returns, naturally many people leave it until the last minute. If you are completing your own return, then that’s fine, however waiting until January to give the information to your accountant will not make you very popular. No matter how much accounting firms prepare, January is always horrible. Not only are the Christmas festivities over, last minute tax returns are a given. If you have left your tax return until the last minute, bear in mind, that you are not the only one.

We advise you to send in your information any time between April to August. This will give us ample time to complete your return. The sooner you send us the information the sooner we can complete the return. We prioritise our returns on whoever sends us the information first.

On a side note, if you are looking to buy a house, your returns will need to be completed for your mortgage. If this is the case you will need to send us your information ASAP and let us know well in advance.

Remember your tax is due in January?

Your tax is due in January. This means that if you leave sending your information until the last minute you could end up with a large unexpected tax bill to pay straight away. If you return gets completed early, you will be able to prepare for paying any tax in January. Or for those lucky people, get a refund early.

Overall, accountants all over Britain ask nicely that you send your tax return information between the months of April-August so we can give you the best possible service and eliminate stressful Januarys once and for all.

If you have any questions on your self-assessment tax return please email jade@1accounts.co.uk

documents

What information is needed to complete my personal tax return?

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…… AND WHY!

It’s that time again ….. tax returns!

From the 6th of April, accountants start to request information from clients. In this blog, we will go through what information accountants need and why.

At 1 Accounts we request the below information from all of our clients via our Karbon software. A secure virtual checklist gets sent to every client automatically on the 6th of April. For more details on when and how to send your tax return information to us please *click here*. Not all of the checklist points apply to everyone, however, we ask all of our clients to write N/A by the tasks that don’t apply, this confirms to us that they aren’t applicable.

karbon checklist

Bank Interest

You have to declare your bank interest received on your tax return. You do not have to pay tax on any interest under £1,000 if you are a basic rate taxpayer or £500 if you are a higher rate tax payer. If you are an additional rate taxpayer, you will have to pay tax on all of your bank interest. However, regardless of the amount you still have to declare any interest you have had. Depending on your bank you will get an April summary that will tell you your annual interest. Your bank should also be able to provide an interest statement on request. Failing both of these, you can just look through your bank statements and add up any interest received, however, this could be long, time-consuming and most of all boring.

Details of Dividends

Your dividends are taxable income (after £2,000), so they have to be declared on your tax return. To send us the details we will need the dividend vouchers. If you do not have these you will be able to ask your accountant managing your business to send them to you. If you are a 1 Accounts client and we look after your company, we will have the dividend information for that business.

If you have invested in any shares, you will also get a dividend certificate. Keep hold of these even if just for a small amount as this will also need to be declared.

Details of rental income and expenses

We will need to know the gross rent. This is the amount of rent that you are paid before any management charges. We will also need a list of your expenses obtained throughout the year. If you have an agent you should be able to ask for a ‘rental statement’. If you don’t have an agent please send us a spreadsheet of your expenses and details of the rent paid to you every month.

Some of our rental clients use Xero to keep track of their income and expenditure. If you would like a version of Xero to be able to do this, just let us know.

Donations Under Gift Aid

This one is a little trickier to find the information. If you have donated through ‘just giving’ or have a monthly subscription to a charity you will be able to find the donation given. All we need is for you to add all the donations together to give us the total figure donated, confirm who you donated too and that it was made under gift aid. Remember that donations made under gift aid will REDUCE YOUR TAX if you are a higher rate taxpayer and so it is worth noting down whenever you give to charity.

Pension contributions

This is another one that you could get tax relief on, depending on the type pension scheme and how the contributions are made into the scheme. We will need the details of all the amounts that have been paid into a pension scheme, whether by you or on your behalf by say your employer. Dependent on your pension provider you should be able to get a statement for the year. If this is applicable we will need to discuss this with you further.

Employment income

If you are employed we will need details of this income from either the P60 or P45. This is because it is part of your total taxable income for the year and is needed to decide your tax band. We will need your P60 or P45 from any employer for whom we don’t run the payroll and don’t worry, any tax deducted at source under PAYE will be deducted from your tax bill.

If you are in receipt of you pension, we will also need this P60 as well.

Details of any other income

If you have had any income that we have not listed above, please tell us. Even if you are not sure it applies. This could include the following:

  • P11D employment benefits received.
  • The sale of capital assets.
  • Inheritance income (if not handled within the estate).
  • Sole trade income (if turnover is above £1,000 we need to know).
  • Sale of shares.
  • Cryptocurrency sales.

What is working from home relief?

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Working from home relief = FREE CASH

Due to the current pandemic, many businesses have been working from home this year (ours included). It looks like those who can work from home will be until March 2021 at the earliest.

We have also seen a change in attitude towards flexible working. It has become the ‘new normal’ and many employees may continue working from home in the future.

What many businesses haven’t realised is that they can get free cash from HMRC for working from home. WOW!

So what is working from home relief?

From 6 April 2020 employers have been able to pay employees up to £6 a week tax-free to cover additional costs if they have had to work from home. Employees who have not received the working from home expenses payment direct from their employer can apply to receive tax relief from HMRC.

Find out full details here –  www.gov.uk/government/news/54800-customers-claim-tax-relief-for-working-from-home.

In a very interesting twist Martin Lewis has reported that even if you work from home for just one week, you can still claim a whole years relief. This is a very public statement from Martin Lewis and we are certain that he has proof from HMRC. However there may be a caveat when HMRC realise what they have said.

Read his article here – https://blog.moneysavingexpert.com/2020/04/martin-lewis–working-from-home-due-to-coronavirus–claim-p6-wk-/

Our advice for employees 

If your employer is not paying the allowance, which they are not obliged to, log into the HMRC portal and make your claim. For basic rate tax payers this is worth £62.40 and higher rate tax payers it is worth £124.80. For 10 minutes of your time, it is worth doing!

Our advice for employers

You do not have to pay the allowance. However as we are coming into the festive season, why not incorporate the £6 per week into a Christmas Bonus? There are no PAYE or NIC deductions for the employer or employee making it a great treat for the end of this turbulent year.

pregnant lady with heart

Did your pregnancy affect your claim?

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Ask HMRC to verify you had a new child which affected your eligibility for the self-employed income support scheme. 

If you are self-employed or a member of a partnership, and having a new child affected the trading profits or total income you reported for the tax year 2018 to 2019, use the HMRC form to ask them to verify that you had a new child.

If you are already eligible for the grant based on your 2016 to 2017, 2017 to 2018 and 2018 to 2019 Self-Assessment tax returns, how HMRC will work out your grant amount will not be affected.

If you are not already eligible you can ask HMRC to check if you had a new child which either:

  • affected your trading profits or total income you reported for the tax year 2018 to 2019
  • meant you did not submit a Self-Assessment tax return for the tax year 2018 to 2019

For this scheme having a new child is any of the following:

  • being pregnant
  • giving birth (including a stillbirth after more than 24 weeks of pregnancy) and the 26 weeks after giving birth
  • caring for a child within 12 months of birth if you have parental responsibility
  • caring for a child within 12 months of adoption placement

You must have been self-employed in the tax year 2017 to 2018 and have submitted your Self-Assessment tax return on or before 23 April 2020.

You must also meet all other eligibility criteria.

Defer your payment on account

Defer Your Self-assessment Payment On Account

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Choose how and when you can delay making your second payment on account for the 2019 to 2020 tax year.

You have the option to defer your second payment on account if you are:

  • registered in the UK for Self-Assessment and
  • finding it difficult to make your second payment on account by 31 July 2020 due to the impact of coronavirus

You can still make the payment by 31 July 2020 as normal if you are able to do so.

The June 2020 Self-Assessment statements showed 31 January 2021 as the due date for paying the July 2020 Payment on Account. This is because HMRC updated their IT systems to prevent customers incurring late payment interest on any July 2020 Payment on Account paid between 1st August 2020 and 31 January 2021. The deferment has not been applied for all customers by HMRC and it remains optional.

HMRC will not charge interest or penalties on any amount of the deferred payment on account, provided it’s paid on or before 31 January 2021.

See: https://www.gov.uk/guidance/defer-your-self-assessment-payment-on-account-due-to-coronavirus-covid-19?utm_source=5d97ee4d-9a24-4553-9a8e-56287f4de9f3&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate