Self employed Payment of account

A question about : Self employed Payment of account

Hi guys not sure if this is the right section or not but

im self employed and this payment on account i cant seem to get my head around

I have payed it for last tax year but can i simply just say i dont want to pay it ? as i feel like instead of me saving the usual 40% i have to save closer to 70% to cover this overpayment for january and july

So what ways can i avoid paying this ? just the payment on account

Any ideas and thoughts welcome thanks guys

Best answers:

• No, you can't just "not pay it". You can reduce it if you feel you less tax will be due.
  Your first payment on account relates to the first half of the tax year you are already in. The second one is for the second half. So you're not paying in advance - if you put aside the tax for all your income as you earn it, you will always have the money to make the payments on account.
  Example:
  Your first year of trading is 2012-13. You bring in Ј30,000 of income, or Ј2.5k a month. As you don't expect to be a higher rate tax payer, you set aside Ј500 a month for tax (lets ignore NIC for the purposes of this example).
  Come April 2013, you have Ј6k set aside for your first tax bill, which isn't due (along with your first self assessment) until the end of January 2014, 9 months later.
  Meanwhile, you continue earning from April to January at roughly the same rate. You continue to put away the tax each month, Ј500.
  Now January 2014 arrives and you should have saved Ј6000 for your first year of trading plus 9 months of tax for 2014/15 - Ј4500. Your January tax bill will be Ј6000 + half again as a payment on account, Ј3000. But as you're already 9 months into that tax year, you've already put aside more than enough money to pay this.
  Come July 2014 you make your second Ј3k payment on account which you should have as you've been continuing to save the tax each month.
  Lets say you'd been earning less in the 2013-14 tax year - you're 9 months in by the time the deadline comes around so you should already have a good idea if your tax bill is going to be higher or lower. If its going to be lower, you can reduce your payments on account to match what you expect it to be. Don't lower it too much - if you lower it more than you should have you will owe interest on the late tax.
  If it turns out you're earning more, you don't have to increase your payments on account but you will need to make a balancing payment the following January - again, if you've been saving the tax as you go, this won't be a problem.
  Obviously the above scenario relies on having good cashflow but if you can get into the routine of setting aside tax automatically you should never have a problem budgeting for payments on account.
  People get confused and wonder why they are paying "in advance" but you aren't, you're still in fact paying in arrears in terms of the period the payments actually relate to.
  The exception is the first year of trading where you get a whole 9 months following your first year until the tax for that year is due but once that's out of the way and your just making payments on account/balancing payments, you should find it easier to manage.
  Compare it to somebody on PAYE who has no choice but to pay the tax in each month that they earn it - you still get longer until your tax is due.
  Does that explain it?
• That is perfect thanks
  I understand why i pay it and how it all works i quite like the idea but i was just wondering if it is optional or not really as i did have a letter to say i could reduce it if i felt the need from hmrc
  As a rule would you know roughly how much i should save as a minimum to cover all these tax and NIC in percentage terms ?
  Being self employed my income varies a fair bit i to try to save 60% of my total income for the month does this seem to much ?
  Thanks for the great response :]
• Probably on the high side but it would eliminate the impact of nasty increases!
  If you are basic rate 30% of all income is a reasonable amount. Higher rate- 45% or more- it does depend how much at higher rate though.
  Only a guesstimate - everyone has their own ideas!
• Thanks last tax year i was 2013-2014 i was lower rate
  this next tax year 2014-15 im higher
  it may stay the same i hope or even drop back to the lower rate cant really tell till December of that tax year
  I think ill stick to the 60% of each months income and anything left over i can use to add to the mortgage fund :]
• I don't think you'd need to put aside more than 45% personally - if you can afford to do that you should be fine.
  By all means put aside 60% if you can afford to, there's no harm in it.
• Are you saving into a pension?
  Are you taking advantage of high interest bank current accounts so that you can earn some interest on the money you save for your tax bill?
• I do what i can with the money i save ie best bank accounts that i have avaliable to me
  ie 4% current account upto 5k
  my main saveing account are poor 1 isa with around 1% and the other is a club save with around 1.5% both of which are easy access which means i get a littel somthing back from it all
  im not in a situation to fix my money for more than any length of time really as im currently set on buying a house currently which will take most of my cash
  The pension im not really doing one now because Id rather be able to own a house now which is what im saving for currently
  The fact i cant take it out till im 55 and even then if i take it all out they tax it puts me off