Inland Revenue - Payment on Account

[pacharan]

I've been stewing over this for months now & it still really hacks me off.

Here's my situation - in the tax year for which I filed my self assessment return in January this year, I earned a few thousand pounds independently of my limited company and consequently had some tax to pay on it. Bill came to around £3k ISTR.

No problem there but what really irks me is that the IR say I need to make a payment on account based on that year's earnings on the assumption I'll have a similar liablility for the current year. A payment based on money I HAVEN'T EVEN EARNED YET!

They wanted £1200 and now they want another payment on account for July.

Of course, I won't be going over the threshold this year so I won't owe them anything & I'll be able to claim it back. But, if I were to go over the threshold and I didn't pay anything on account they would clobber me with penalties.

Am I missing something or am I just effectively acting as 0% interest rate loan scheme to the IR??

[xoggoth]

From the little I know of it that about sums it up.

[Taxless]

I've been stewing over this for months now & it still really hacks me off.

Here's my situation - in the tax year for which I filed my self assessment return in January this year, I earned a few thousand pounds independently of my limited company and consequently had some tax to pay on it. Bill came to around £3k ISTR.

No problem there but what really irks me is that the IR say I need to make a payment on account based on that year's earnings on the assumption I'll have a similar liablility for the current year. A payment based on money I HAVEN'T EVEN EARNED YET!

They wanted £1200 and now they want another payment on account for July.

Of course, I won't be going over the threshold this year so I won't owe them anything & I'll be able to claim it back. But, if I were to go over the threshold and I didn't pay anything on account they would clobber me with penalties.

Am I missing something or am I just effectively acting as 0% interest rate loan scheme to the IR??

You can sort this out now and fairly easily.

The tax return you submitted in January was for the year ended 5 April 2010 and so in January 2011 you were paying your balancing payment for that year, plus your first interim payment for 2010/11.

The 2010/11 tax year finished on 5 April 2011 and so you should now be able to ascertain what income (salary & dividends) you took out of your company for that year and also the level (if any) of your 2010/11 independent income.

In other words, you should be in a position to submit your 2010/11 tax return and whatever liability that shows simply replaces the interim payments.

You seem to suggest that the 2010/11 liability will be less than that for 2009/10, so the July payment should be reduced or if the liability is less than what you have already paid as an interim payment in January, you will have a tx repayment to come back.

I would recommend that you get this done before the 31 July payment date.

[Clare@InTouch]

I've been stewing over this for months now & it still really hacks me off.

Here's my situation - in the tax year for which I filed my self assessment return in January this year, I earned a few thousand pounds independently of my limited company and consequently had some tax to pay on it. Bill came to around £3k ISTR.

No problem there but what really irks me is that the IR say I need to make a payment on account based on that year's earnings on the assumption I'll have a similar liablility for the current year. A payment based on money I HAVEN'T EVEN EARNED YET!

They wanted £1200 and now they want another payment on account for July.

Of course, I won't be going over the threshold this year so I won't owe them anything & I'll be able to claim it back. But, if I were to go over the threshold and I didn't pay anything on account they would clobber me with penalties.

Am I missing something or am I just effectively acting as 0% interest rate loan scheme to the IR??

You can make a claim to reduce your payments on account on the grounds that other income has decreased. Problem solved

Talk to your accountant, or you can do it online through the HMRC Gateway.

[Taxless]

Sorry, missed a bit off the end.

The setting of interim payments is statutory based on the previous years figures and does assume that income sources will continue.

They have nothing else to go on and you are the one who has the full facts on your affairs.

As soon as you become aware that your liability will fall in the later year you can apply to reduce them.

If you get it wrong then you will be charged interest and if HMRC think you were negligent or fraudulent in arriving at your estimates, there could be a penalty of up to 100% of the shortfall.

The penalty is for chancers, not hnest mistakes so as soon as you are aware you have messed up, you go back to HMRC with updated figures.

[Bumfluff]

I've been stewing over this for months now & it still really hacks me off.

Here's my situation - in the tax year for which I filed my self assessment return in January this year, I earned a few thousand pounds independently of my limited company and consequently had some tax to pay on it. Bill came to around £3k ISTR.

No problem there but what really irks me is that the IR say I need to make a payment on account based on that year's earnings on the assumption I'll have a similar liablility for the current year. A payment based on money I HAVEN'T EVEN EARNED YET!

They wanted £1200 and now they want another payment on account for July.

Of course, I won't be going over the threshold this year so I won't owe them anything & I'll be able to claim it back. But, if I were to go over the threshold and I didn't pay anything on account they would clobber me with penalties.

Am I missing something or am I just effectively acting as 0% interest rate loan scheme to the IR??

If you know you won't hit that level in the next tax year you just tell HMRC you want to reduce your payment on account. Also I always put in my SA in before the next July payment is due as then it recalcs to the true balancing payment, so I've already submitted my 10-11 SA and that what I pay as my 2nd payment in July is the true amount I owe.

[pacharan]

Thanks.

It still looks like I'm providing a 0% interest loan scheme to the IR.

Why the hell should I pay up for money I haven't even earned yet? Especially when the chances are that I'm going to claw it all back once my SA has been submitted.

Doesn't seem fair.

[Taxless]

Thanks.

It still looks like I'm providing a 0% interest loan scheme to the IR.

Why the hell should I pay up for money I haven't even earned yet? Especially when the chances are that I'm going to claw it all back once my SA has been submitted.

Doesn't seem fair.

You do not have to pay tax on income not yet earned. the position can be set out as follows, assuming it was an ongoing source of income that started say 6/4/09.

You don't pay the tax on the income earned in the year to 5/4/10until 31/1/11, 9 months after the end of the year (0% loan from HMRC?)

You then pay the tax on the income for the year ended 5/4/11 (initially an estimate based on the previous years liability) 50% on 31/1/11 (when you would have earned around 10/12ths of the income) and the other 50% on 31/7/11, almost 4 months after the end of the year.

So not really a 0% loan to HMRC.

If there is no income in the subsequent year, or the level drops, you are completely free to drop the tax payments to a realistic level, so you never have to pay tax on income that you haven't earned.

This is certainly a lot better cash flow than under PAYE where you pay as you go (earn).

Hope this makes sense.

[pacharan]

You do not have to pay tax on income not yet earned. the position can be set out as follows, assuming it was an ongoing source of income that started say 6/4/09.

You don't pay the tax on the income earned in the year to 5/4/10until 31/1/11, 9 months after the end of the year (0% loan from HMRC?)

You then pay the tax on the income for the year ended 5/4/11 (initially an estimate based on the previous years liability) 50% on 31/1/11 (when you would have earned around 10/12ths of the income) and the other 50% on 31/7/11, almost 4 months after the end of the year.

Got it, thanks. I guess this has never applied to me before as I have either always paid PAYE or paid myself dividends keeping myself on the threshold so nothing is ever owed on Jan 31.

As I said in my OP, it was an anomaly in that I did some self employed work abroad separately from my Ltd & I declared it on my return. Was a bit of a shock having to pay up for 2009-2010 as well as the payment on account for 2010-2011, even though I was 10/12 of the way through the year.

[Taxless]

Got it, thanks. I guess this has never applied to me before as I have either always paid PAYE or paid myself dividends keeping myself on the threshold so nothing is ever owed on Jan 31.

As I said in my OP, it was an anomaly in that I did some self employed work abroad separately from my Ltd & I declared it on my return. Was a bit of a shock having to pay up for 2009-2010 as well as the payment on account for 2010-2011, even though I was 10/12 of the way through the year.

It is a common shock as a lot of accountants tell clients something along the lines of "You don't pay any tax in your first year".

Understandably, lots of people new to self employmenmt think this is a great government tax break (as if) only to have the same shock as you, when the first tax bill arrives.

Just be grateful that not all of your income was through self employment. Ouch!