Planning for your self assessment tax bill
The UK income tax year is 6 April to the following 5 April and so the tax year 2015/16 ran from 6 April 2015 to 5 April 2016.
You will need to complete a self assessment tax return if you are self employed, have untaxed income (eg rent), or if you, or your partner, have an individual income of more than £50,000 and one of you gets Child Benefit or contributions towards the upkeep of a child. Limited company directors are often required to submit a tax return.
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.
Student loan repayments collectable under self assessment (typically the self employed and directors receiving salary and dividends from their own company) are also included in the January self assessment payment but not in the payment in account.
Although the deadline is 31 January for e-filed tax returns, we suggest that your return is submitted to HMRC as early as possible.
References to “tax bill” in this article refer to your tax and class 4 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 2016 you paid:
The balance* of the amount you owed for the tax year 2014/15, plus
50% of your 2014/15 bill “on account” for 2015/16.
In July 2016 you pay:
50% of your 2014/15 bill “on account” for 2015/16.
In January 2017 you pay:
The balance* of the amount you owe for the tax year 2015/16, plus
50% of your 2015/16 bill “on account” for 2016/17.
* 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.
1. Profits rising
If your total tax bill for 2014/15 was £5,000 of which you had already paid £4,200 on account, HMRC would assume that your tax bill for 2015/16 would be at least £5,000.
Your January 2016 payment would have been £3,300 – your balancing payment for 2014/15 of £800 plus the first instalment of your payment on account for 2015/16 of £2,500 .
The second payment on account in July 2016 would be £2,500 .
If, when you prepare your 2015/16 tax return, your tax bill is actually £5,500 , your payment in January 2017 would be £3,250. This is £500 in respect of the balance of your 2015/16 tax bill (£5,500 less two payments on account of £2,500 each) plus £2,750 on account of your 2016/17 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 2017 you expect your profits to be lower than the previous year and you anticipate your tax bill for 2016/17 to be £4,000 , you can apply to reduce the payment on account in January 2017 to be £2,000 .
The July 2017 payment on account would also be £2,000 . If your 2016/17 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.
Jo, started her sole trader business in September 2014 and did her first accounts to 31 March 2015. 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 2014/15 and therefore no 2015/16 payments on account would be required in January 2016 nor July 2016.
For the year ended 31 March 2016 her tax bill is £5,000 . Normally the payments on account in January 2016 and July 2016 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 2017, her payment will be £7,500 being £5,000 in respect of 2015/16 plus £2,500 as the first payment on account for 2016/17 .
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.