Planning for your self assessment tax bill

The UK tax year is 6 April to the following 5 April. So the tax year 2011/12 ended on 5 April 2012.

You will need to complete a self assessment tax return if you are self employed or a limited company director.

Click here to read our free guide on starting a business and registering with HMRC (opens in a new window).

Although the deadline is 31 January for e-filed returns, we recommend that you complete your tax return and submit it to HMRC as early as possible. Click here to download a useful pdf tax return checklist.

A self employed person will pay both income tax and class 4 national insurance (NI) on their profits plus income tax on any other income and capital gains tax on any relevant capital gains in the tax year.

The amount of tax and NI due will depend upon the business’ profits and your total income. There are several rates and thresholds at which the rates change. The current personal allowances, rates and thresholds are here (opens in new window). References to “tax bill” in this article refer to your tax and NI bill.

Your tax bill is paid in two instalments.

The two instalments are payable in January and July, and take into account your actual tax bill for the previous tax year and an estimate of your bill for the current tax year.

In January 2012 you paid:
The balance* of the amount you owed for the tax year 2010/11, plus
50% of your 2010/11 bill “on account” for 2011/12.

In July 2012 you would pay:
50% of your 2010/11 bill “on account” for 2011/12.

In January 2013 you would pay:
The balance* of the amount you owe for the tax year 2011/12, plus
50% of your 2011/12 bill “on account” for 2012/13.

* The balance is calculated as:
Total bill based on your self assessment tax return
less: First payment on account (paid in previous January)
less: Second payment on account (paid in previous July)

If by paying the two payments on account you have overpaid for the tax year, the overpayment is deducted off the payment on account in January.

How your payments are calculated.

The payments are based on your actual tax bill for the previous tax year and an estimate of your bill for the current tax year.

Some examples.

1. Profits rising

If your total tax bill for 2010/11 was £5,000 of which you had already paid £4,200 on account, HMRC would assume that your tax bill for 2011/12 would be at least £5,000.

Your January 2012 payment would have been £3,300 – your balancing payment for 2010/11 of £800 plus the first instalment of your payment on account for 2011/12 of £2,500 .

The second payment on account in July 2012 would be £2,500 .

If, when you prepare your 2011/12 tax return, your tax bill is actually £5,500 , your payment in January 2013 would be £3,250. This is £500 in respect of the balance of your 2011/12 tax bill (£5,500 less two payments on account of £2,500 each) plus £2,750 on account of your 2012/13 tax bill (50% of £5,500).

2. Profits falling
Where your profits are falling, you can apply to reduce the payments on account so that you do not overpay. However, if you have reduced the payment to below your actual tax bill, you will be charged interest on the difference.

If in January 2013 you expect your profits to be lower than the previous year and you anticipate your tax bill for 2012/13 to be £4,000 , you can apply to reduce the payment on account in January 2013 to be £2,000 .

The July 2013 payment on account would also be £2,000 . If your 2012/13 tax bill is actually £4,100 you would pay interest on the £100 difference.

If you are in the early years of your business read this.

A new sole trader business may have low profits in the first year which means that the payments on account in January and July for the next tax year would be low or even nothing.

However, the payment in the following January would be the full tax bill for the previous tax year plus 50% on account. This catches out many sole traders in the early years of their business as they may not have put enough money aside to pay their tax bill.

For example.

Jo, started her sole trader business in September 2010 and did her first accounts to 31 March 2011. In common with many new businesses her profits were below the tax and class 4 NI thresholds. As a result she had no bill for 2010/11 and therefore made no payment in January 2012.

For the year ended 31 March 2012 her tax bill is £5,000 . Normally the payments on account in January 2012 and July 2012 would go some way to pay this bill. However, as the payment on account was based on the previous bill, she will not have made any payments on account.

In January 2013, her payment will be £7,500 being £5,000 in respect of 2011/12 plus £2,500 as the first payment on account for 2012/13 .

Prepare your accounts promptly and plan for your tax bill.

The above example is a very common situation that new and growing businesses find themselves in. We suggest you prepare your year end accounts as soon as possible after the tax year has ended so that you have plenty of time to plan how to pay your tax bill.

HMRC will charge interest on late paid tax, plus a surcharge of 5% if the January payment is not paid by 28 February.

HRBS can help you.

Keith Silman has 25 years of experience helping new businesses and provides a professional service at a reasonable fixed fee. Call Keith on 01226 379000 or click here for a free, no obligation fixed fee quotation (opens in a new window).