Many people are caught out by payments on account, particularly when it comes to their first tax return. Most people know that the deadline for paying their tax bill is 31 January after the tax year end. This is the same deadline for submitting the tax return. For example, for the tax year 2015/16, the self-assessment tax return and the final payment are both due by 31 January 2017.
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.
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.”
Mike began trading on 6 April 2015 and has been lucky enough to make a profit, during 2015/16, 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 2016/17, and that is estimated as 50% of his 2015/16 tax bill, he actually has to pay £1000+£500=£1500 on or before 31 January 2017.
His second Payment on Account for 2015/16 is due on or before 31 July 2017 and will be another £500.
If his tax and NI for 2016/17 actually comes out as £1200, then his final payment for 2016/7, which would be due on or before 31 January 2018, would be £200. However, now he has to make a 50% payment on account for 2017/18, which would be £1200 x 50% = £600.
So, the total he would have to pay by 31 January 2018 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.