Meeting Your Tax Responsibilities When You’re Self Employed
Trying to decipher your balancing payment from your payments on account? Here’s how to make sense of your latest tax calculation.
If you’ve recently become self-employed, then your first responsibility is to inform HMRC so that they’re aware of your change in employment status. They will ask you to register for Self Assessment as a way to report your earnings and pay the tax that is due. The tax year runs from April 6th to the following April 5th of any given year, and you have until the next January 31st to file your tax return and pay the tax that is due. If you’re struggling to make sense of the amount of tax you owe, this guide will help you get to grips with the Self Assessment tax calculation process.
Filling Out Your Return
To fill out your return digitally, you should log into the government gateway and register for Self Assessment. When you fill out your first return, you’ll be asked to provide details of all your earnings for the year including any PAYE wages you receive. When you get to the end of your return, you’ll be provided with a Tax Calculation before you submit the return. Your calculation will deliver an onscreen snapshot of what you owe in tax, and the deadlines to pay your bill by. After you’ve submitted your return, your final tax calculation will take 72 hours to show up in your gateway account.
Balancing Payment
If you owe tax, then your bill will include a ‘balancing payment’ which is based on the amount you owe for the previous tax year. Remember that if you have earned less than the Personal Allowance threshold which is £12,500 for the 2019/20 tax year, then you will not pay income tax on your earnings up to this point. Your balancing payment will be due by midnight on 31st January following the previous tax year and failure to pay on time may result in a penalty fee.
Payments On Account
If your balancing payment is more than £1,000, then you will usually also be charged for ‘payments on account’ which is a split 50:50 amount equal to your balancing payment and will be due to be paid in two instalments on January 31st and July 31st. An accountancy services Peterborough team explains that these payments on the account go towards your next year’s tax bill and include your Class 4 NI contributions.
When it comes to your following year’s tax bill, in the event that you earn more than you did the previous tax year, then you’ll be required to pay an additional balancing payment to cover the excess owed. However, in the event that you earn less than predicted by HMRC, you will be entitled to a refund as you will have overpaid via your payments on account.
Reducing Payments On Account
If you forecast in advance that you’ll be earning less this tax year than previously, and you don’t want to pay a higher figure for your payments on account, you can opt to reduce the amount you pay in your two instalments. However, doing so comes with the risk that you’ll end up underpaying, in which case you’ll be charged interest.
Self-assessment can be tricky to get to grips with when you’re new to self-employment. If you need any assistance at all with your tax, it’s usually best to outsource your tax obligations to a professional accountant who will make sure that you’re meeting all of your responsibilities and may even be able to save you some money on your next tax bill!
