Do you really need to pay the tax man in advance?

Jun 10, 2015

Croombs Chartered Accountants in Hampshire

If you are involved in submitting annual tax returns to HMRC I thought it would be useful to discuss tax that you may pay upfront on business or personal profits.

If an individual or self employed business owes around £1,000 in tax for a tax year then it is likely that HM Revenue & Customs will ask for payments on account for the next year.  These each total 50% of the total tax bill for the year and are payable in January and July each year.  You will be exempt from making payments on account if your income taxed at source was 80% or more of your total income.

For example if you owed £2,000 in tax for the tax year ended 5 April 2015 then this would be due in January 2016 along with a £1,000 payment on account of next years tax.  This means that in January 2016 you would owe £3,000 and in July 2016 you would owe your second payment on account of £1,000.  This means that a total of £2,000 would have been paid in advance against your 5 April 2016 tax liability.

In certain circumstances these payments on account can be reduced without penalties.  These are:

  • Profits are expected to decrease in your next financial year compared to the previous year.
  • Taxable profits will decrease because you have purchased equipment which you can claim an allowance against.
  • The business is ceasing to trade.
  • You received a large one off dividend last year which you’re not expecting to receive this year.

If you think that your income or profits may be reducing in the next financial year then it is worthwhile speaking to your Accountant to ensure you get the correct advice regarding your tax payments.

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