If you pay your tax to HMRC through payments on account, there are only a few weeks to go until you have to settle your next instalment at the end of July.
How much you’re due to pay on 31st July will be based on the profits your business made in the financial year 2017-18. In working out your payments on account , HMRC would have made an assumption that your results for 2018-19 were going to be at least as good as the preceding year.
But of course, this isn’t the way things always go. Running a business is rarely plain sailing, and it’s not easy to accurately predict your performance 12 months in advance.
Fluctuations in the economy, shifts in market conditions, and changes to personal circumstances can sometimes result in a challenging year when profits go down rather than up.
In short, there might be any number of reasons why 2018-19 wasn’t a vintage year for your business. Hopefully, the current financial year is looking better, but either way, you won’t want to pay HMRC any more than you have to.
If you move quickly, there’s still time to reduce the amount you’ll be required to pay on 31st July.
But before we explain how you can avoid overpaying, let’s take a quick look at payments on account – what they are and how they work.
- What Are Payments on Account?
For anyone in employment, HMRC collects tax at source, deducting what’s due through the Pay As You Earn (PAYE) scheme. However, if you’re self-employed, HMRC requires you to settle any tax you owe with them directly.
If your receive a Self Assessment tax bill for less then £1,000, you’ll be liable to pay any tax due in a single instalment in the January following the end of the tax year. But if your Self Assessment tax bill is more than £1,000, HMRC will require you to make two advance contributions towards your next tax bill. Known as payments on account, you’ll have to pay the first of these instalments on 31st January, and the second on 31st July.
Even the taxman doesn’t have the ability to look into the future, so to calculate how much your payments on account will be, HMRC must make an educated guess about your future performance. They assume that your financial situation will remain unchanged for the following financial year, and on this basis, each payment you have to make will be equivalent to half your previous year’s tax bill.
Note: Payments on account will include your Class 4 National Insurance, and if there’s any tax still to pay after you’ve made both instalments, you’ll have to pay the balance by 31st January the following year.
- If 2018-19 Was Tough, How Can You Reduce Your July Payment on Account?
The payments on account system works fine for businesses that perform consistently, or enjoy ongoing growth. But as already noted, it’s far from uncommon for businesses – especially new ones still finding their feet, to experience a dip in profitability from time to time.
If your business is going through a temporary downturn, a big tax bill looming on the horizon is the last thing you want to have to deal with – but if you act quickly, there’s no reason why you should have to.
It stands to reason that if 2018-19 was more challenging than 2017-18, your tax bill is going to be less. By getting your tax return organised now – rather than waiting until the January 31st deadline, you can give your accountant time to put a request into HMRC to reduce your July payment on account.
Regular readers of this log will know that we’re always stressing the advantages of filing your Self Assessment tax return early, and this is one of them. Having to pay a lower figure than you’re currently anticipating could significantly help your cash flow. Depending on your situation, you could even end up receiving a tax refund in July rather than having to make a payment.
Act Now to Make Sure You Pay No More Than You Need to on 31st July!
Working exclusively with owners of micro and small businesses, no one understands the ups and downs of running a business better than we do. If you think you’re set to pay more than you need to at the end of July, we can help you get your Self Assessment tax return completed and filed so you’ll only have to pay what’s due.
We will liaise with HMRC on your behalf to ensure that what you pay (if you have to pay anything at all) is based on actual – rather than predicted profit. And if you’ve overpaid your tax, we’ll make sure you get refunded now, rather than having to wait!