If you are trading as a sole trader, as opposed to a limited company, your business profits will be declared and taxed as part of “self-assessment.”
Most people know the deadline for submitting this tax return is the 31 January AFTER the tax year end. (so, for 20010/11, the self-assessment tax return is due by 31 January 2012).
The unfortunate thing that catches many people out is the payments on account system and a 50% payment on account for the current tax year is ALSO DUE by 31 January.
Mike began trading on 6 April 2010 and has been lucky enough to make a profit, during 2010/11, and his Tax and Class 4 National Insurance bill comes to £1,000
So, total to pay by 31 January is £1,000 right?
WRONG!
Because Mike also has to pay his first “Payment on Account” in respect of 2011/12, and that is estimated as 50% of his 2010/11 tax bill, he actually has to pay £1000+£500=£1500 on or before 31 January 2012.
His second Payment on Account for 2011/12 is due on or before 31 July 2012 and will be another £500.
If his tax and NI for 2011/12 comes out as £1200, his final payment for 2011/12, which would be due on or before 31 January 2013, would be £200. However, now he has to make a 50% payment on account for 2012/13, which would be £1200 x 50% = £600.
So, the total he would have to pay by 31 January 2013 would be £200+£600=£800
(and so it goes on)
If you have reason to believe that your profits in any year are lower than the previous year’s, you may make an application to reduce your payments on account.
To save hassle, is it possible to simply submit all your books earlier on a set date instead? It’s much easier for a freelancer like me to just have one day to work towards for everything.
On a similar note, I’ve been looking around the web for a good accountant. I keep seeing SJD contractor accountants cropping up for a lot of freelance stuff, but wondered what you guys could offer to someone who is freelancing in addition to a full-time job.
As you may have gathered, I haven’t declared anything to the tax man yet and the IR35 makes very little sense to me. Would you even deal with an accountant as small as mine?
This seemed like a good place to ask these things.
Many thanks
Adam
Hi,
You could submit your tax return as early as you liked – there is some advantage to this, since your tax liability would be known much earlier (presumably enabling you to plan better for it). You could, indeed, also pay your tax liability early. However, once into the second year, “payments on account” will generally apply.
We work with contractors, freelancers, traders and small business owners. Generally, we are more flexible than most accountants (in that we will tailor our services to what you need, and what you prefer to do for yourself – essentially, it’s the trade-off between freeing up your time vs lowering your fees). We also have out-of-hours availability, which might be useful if you are in the office “doing the day job.”