We all need to pay tax – it’s a fact of life. Despite this, it’s often painted as a bad thing and something which is littered with unfair rules and regulations.
No matter your opinion on the UK tax system, there’s no escaping the fact that you’ll need to file your self-assessment by the end of January if you’re self-employed, a landlord or receive dividend income.
The good news? You can make tax far less burdensome by planning ahead. This enables you to adjust your accounts and make sure you’re claiming for the right amount of tax relief.
Leave it too late, and you’ll miss out or, worse, forget entirely. Thankfully, HMRC gives you the ability to pay in advance towards your self-assessment tax bill.
Known as a ‘payment on account’, this splits your tax bill into two payments spaced equally apart during the year and can help considerably with cash flow.
Who can use payments on account?
Payments on account apply to self-assessment tax bills.
If you’re self-employed or obtain another source of income (from something like a rental property), you’ll need to complete a self-assessment each year.
It’s important to note that this relates to personal tax only – not that of a limited company or other corporate entity.
How it works
If your tax liability for the tax year is more than £1,000, you will need to make payments on account for the next tax year.
HMRC will estimate that your next tax bill will likely be very similar to the previous year and subsequently allows you to pay the same amount in advance, split between two payments.
For instance, if you paid £10,000 last year, you’ll make a payment of £5,000 for the next one on 31st January and another for the same amount on 31st July.
This might include National Insurance contributions, but not Capital Gains Tax or student loan repayments.
Why it pays to get your accountants in early
The UK tax system features a complex set of rules, and, while it’s possible to complete a self-assessment yourself, it’s highly advisable to use the services of an experienced accountant.
The reason is simple; an accountant will ensure your return works in your favour by lawfully using every tax allowance and rule that benefits the worker.
The earlier you get your accountants in to look at your self-assessment, the more chance you stand of reducing the amount to pay and the resulting two payments on account.
Reducing your payment on account improves your cash flow
Payments on account are great ways to improve your cash flow and make that annual hit on the bank account a little easier to bear.
If you follow our tip above and get your accountants in as early as possible to look at the return, those 50% payments could be significantly lower, and that will prove far more comfortable to budget for throughout the year.
A smaller payment on account means you’ll have more cash in the bank to invest in your business. Who says tax is unfair?
Let’s plan for that January payment
If you’re reading this long before January, it might feel like rather too early to start thinking about your self-assessment tax return but acting now is smart, especially if you may be due a refund!
If you’d like help with your self-assessment return or have any questions about payments on account, just get in touch with our friendly team.