One of the most problematic aspects of life as a contractor can be the unpredictable nature of your income. This makes it tricky to stay on top of your obligations to HMRC, especially if you calculate your own self assessment bill. One common cause for worry among contractors is an unexpectedly large tax demand, where the extra liability comes from the need to make payments on account. Because forewarned is forearmed, we introduce you to HMRC’s payments on account system, and tell you how (and when) to reduce your payments.
What Are Payments On Account?
Payments on account are advance payments towards next year’s tax bill, and each one amounts to half the amount of your last bill from HMRC. Imagine you owe £10,000 for the current tax year: next year you’ll be asked to make two payments on account, each totalling £5,000. The first instalment needs to be paid by January 31st–at the same time you pay your outstanding tax–and the second is due by July 31st.
Who Needs To Make Payments On Account?
We advise you to apply the general rule of thumb that if you’re self employed and your tax bill for the previous year was more than £1,000, you’ll be asked to make payments on account. However, if 80% or more of your tax was deducted at source in the previous tax year, you won’t be required to make them. It’s worth noting that where your subsequent tax bill is larger than the balance of your two payments on account, you’ll be required to make a ‘balancing payment’ to redress the difference.
How To Reduce Your Payments On Account
As a contractor, you’re well aware how much your income can vary between one financial year and the next. When you know that your next tax bill will be substantially lower than last year’s, it makes sense to approach HMRC with a request to reduce your payments on account. This is a straightforward process: either complete form SA303 and submit it by post to your tax office, or log in to your online self assessment account and click the ‘reduce payments on account’ link.
…And When Not To
HMRC usually look favourably upon requests to reduce payments on account, but don’t be tempted to submit a request just because you’ve been caught unawares by a higher than expected tax bill. If your liability in the next year turns out not to be reduced, you’ll be charged interest on any outstanding tax. This will be backdated to the day your original payment was due.
Being blindsided by a demand for payments on account is a common experience for contractors, but there’s no real need for you to go through this unpleasant experience. A specialist accountant can help you take a proactive approach to your tax obligations, and eliminate unpleasant surprises come January 31st. Call or email Taxup to discuss our bespoke contractor services.