So now that I'm all setup, I thought I'd start with the most common query I had in January, Payments On Account
How they work
When your relevant earnings (broadly the tax on everything other than employment income) exceeds £1,000, HMRC make you pay the same amount again towards next year's tax return. The first time you have to make these payments, it can seem like you're paying double the tax which, in a way, you are.
However, this is only the case in the first year and, going forward, they shouldn't have as much of an impact because you always have the brought forward amounts from the prior year.
Also, they do let you pay half of the payment on account in January and half in July.
Then, in the last year you pay tax, they should hopefully mean you pay hardly anything!
Example
For the purposes of the example, we'll assume your tax to pay and relevant tax are the same, it makes things easier.
Let's say your tax bill for 2022 is £1,500. You have tipped over the Payments On Account threshold. This means that you will be due to pay the following:
Tax for the year - £1,500
1/2 payment on account - £750
January 2023 - £2,250
July 2023 - £750
In 2023, you earn a bit more, and your tax for the year is £2,000, this means you'd pay:
Tax for the year - £2,000
1/2 payment on account - £1,000
2022 payments on a/c - (£1,500)
January 2024 - £1,500
July 2024 - £1,000
Then, in 2024, you find your dream job as a gin tester earning £1m pa, so go into employment. As a result, your tax bill for the year is only £100. As a result, the amount you have to pay is:
Tax for the year - £100
1/2 payment on account - £0 (your tax is now less than £1,000)
2023 payments on a/c - (£2,000)
January 2025 - (£1,900)
July 2025 - £0
Remember payments on account can mean that the amount of tax you pay is nothing like the earnings you made in the year.
Summing it all up
There's no denying that the payments on account are a nightmare in the first year, and finding the extra cash can be extremely difficult. However, if you want to take the positives, if your tax is more than £1,000, then your business is on the up. You can also think of the payments on account as a mini savings account for when you retire.
If you are really struggling to pay, it's always worth speaking to HMRC
Serenity Accounts
If all of this seems like gobbledegook, or you just want someone to run through it again, go to Serenity Accounts, we can definitely help. We're also running offers for new and existing clients.
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