What Is Payment On Account?
Unlike employees who have to pay their tax each month as they earn it (pay as you earn or PAYE) one of the benefits of being a sole trader is that your tax bill is not due until the end January after that prior tax year.
So for tax year 2019/20, your tax bill would be due on the 31st January 2021.
However…there’s often a catch with HMRC… you are required to make a ‘payment on account’.
Payment on account is basically an upfront tax payment for money you haven’t yet earnt but are expected to earn next year.
When you submit your return to HMRC, they will automatically assume that you will earn the same next year and so will expect half of the tax to be paid by the 31st January and the other half paid by 31st July.
How Can I Not Pay On Account?
You can elect not to pay on account if you think that you will earn less in the next tax year. However, if it turns out that you end up earning the same or more, HMRC will impose a penalty and interest payments on the amount not paid.
This can end up catching you out at the beginning. If you’ve diligently budgeted for your tax liability throughout the year and then didn’t realise you had to pay an additional 50% on account by the end of January, the bill can come as a nasty shock!
It’s important to note however that once you get over the initial ‘pain’ you’ll be up to date. Your on account payments made last year will cover your tax liabilities and your new payments will cover the next year.
So it’s really just getting over that first year’s pain!
What Happens If I Don’t Have The Money?
First of all, it’s very important to have an accountant who can help you budget and plan for all your tax liabilities. We highly recommend anyone completing a self-assessment use an accountant, and of course, if you’re looking for one then feel free to give us a call.
However, things happen and if you just don’t have the money you’re not going to be able to pay.
The first thing to do the moment you realise you can’t pay is to call HMRC and explain the situation. HMRC are very reasonable to deal with if you keep them informed of what’s going on. They only become unfriendly if you ignore letters, demands and bury your head in the sand.
You may be able to come up with a payment structure or reduce the penalties if you speak to HMRC. Put it this way the problem won’t get any worse by speaking to them, it can only get better!
If you’re looking for an experienced accountant to help you deal with all your tax affairs, give us a call. We’re here to help business owners like you.