Self-employed tax - payments on account
Discussion
TLDR: Hoping someone can help me understand what happens when you file your tax return early, well before the end of July. Does it adjust the July payment, and if so how?
Mrs Oxgreen has been running a part-time private tutoring business for a number of years alongside being a teacher. But since September, she has quit the day job and has been ramping up the tutoring business.
Being relatively new to self-employment and the self-assessment that goes with it, we have both been permanently confused by the way HMRC charges for tax. Neither of us has been able to anticipate what we’ll need to pay each January and July (except of course looking online).
With the big ramp-up in her tutoring, I feel it’s important to wrap my brain around this because clearly the self-assessed tax is going to become much bigger, and we don’t want to get caught out by a big charge.
Obviously I’ve looked at the example on the HMRC web site, and I think I’ve finally got it. According to that page, each tax return triggers a 50% payment the following January, and another the subsequent July. And there’s a “balancing payment” in the January to adjust for when your current year’s payments on account either under- or over-paid the tax you’ve just declared.
So far, so good. But I don’t think that’s the full story.
My suspicion (and I’m hoping you folk can clarify this) is that if you file your return early - well before the end of July - the system takes the opportunity to adjust the July payment straight away. Is that correct?
If that’s the case, what exactly is it doing? Does it move the balancing payment forward by six months and apply it in the July immediately following your tax return submission (rather than the following January), or does it make some other adjustment to July’s payment on account?
Mrs Oxgreen has been in the habit of filing her tax return early, as soon as she’s got the P60 from school. This makes it easier because everything is fresh in the mind. Our recollection is that the account balance did change some time after she filed in May this year, so something happened but I’d like to understand exactly what!
As I mention, there’ll be a big step up in Mrs Oxgreen’s self-employed income when she files her return in 2023. I’d really like to understand the implications so I can anticipate the charges in July 23, January 24 and July 24.
Might it even be better to delay filing until after July 23 to prevent the system increasing the July 23 payment, albeit resulting in a huge balancing payment in Jan 24? That way, the money would sit in our account for six months longer!
Thanks!
Mrs Oxgreen has been running a part-time private tutoring business for a number of years alongside being a teacher. But since September, she has quit the day job and has been ramping up the tutoring business.
Being relatively new to self-employment and the self-assessment that goes with it, we have both been permanently confused by the way HMRC charges for tax. Neither of us has been able to anticipate what we’ll need to pay each January and July (except of course looking online).
With the big ramp-up in her tutoring, I feel it’s important to wrap my brain around this because clearly the self-assessed tax is going to become much bigger, and we don’t want to get caught out by a big charge.
Obviously I’ve looked at the example on the HMRC web site, and I think I’ve finally got it. According to that page, each tax return triggers a 50% payment the following January, and another the subsequent July. And there’s a “balancing payment” in the January to adjust for when your current year’s payments on account either under- or over-paid the tax you’ve just declared.
So far, so good. But I don’t think that’s the full story.
My suspicion (and I’m hoping you folk can clarify this) is that if you file your return early - well before the end of July - the system takes the opportunity to adjust the July payment straight away. Is that correct?
If that’s the case, what exactly is it doing? Does it move the balancing payment forward by six months and apply it in the July immediately following your tax return submission (rather than the following January), or does it make some other adjustment to July’s payment on account?
Mrs Oxgreen has been in the habit of filing her tax return early, as soon as she’s got the P60 from school. This makes it easier because everything is fresh in the mind. Our recollection is that the account balance did change some time after she filed in May this year, so something happened but I’d like to understand exactly what!
As I mention, there’ll be a big step up in Mrs Oxgreen’s self-employed income when she files her return in 2023. I’d really like to understand the implications so I can anticipate the charges in July 23, January 24 and July 24.
Might it even be better to delay filing until after July 23 to prevent the system increasing the July 23 payment, albeit resulting in a huge balancing payment in Jan 24? That way, the money would sit in our account for six months longer!
Thanks!
HMRC will never INCREASE Payments on Account POA). They are based on the previous years actual tax liability.
2021/22 - actual liability £5,000
1st POA for 2022/23 due 31 January 2023- £2,500
2nd POA for 2022/3 due 31 July 2023 - £2,500
When the 2022/23 tax return is prepared you discover that the REAL liability for 2022/23 is £6,000. As you have paid £5,000 on account (£2,500 x 2) the balancing payment yopu will need to pay on 31 January 2024 is £1,000 (£6,000 les £5,000 already paid).
2021/22 - actual liability £5,000
1st POA for 2022/23 due 31 January 2023- £2,500
2nd POA for 2022/3 due 31 July 2023 - £2,500
When the 2022/23 tax return is prepared you discover that the REAL liability for 2022/23 is £6,000. As you have paid £5,000 on account (£2,500 x 2) the balancing payment yopu will need to pay on 31 January 2024 is £1,000 (£6,000 les £5,000 already paid).
Eric Mc said:
HMRC will never INCREASE Payments on Account POA). They are based on the previous years actual tax liability.
2021/22 - actual liability £5,000
1st POA for 2022/23 due 31 January 2023- £2,500
2nd POA for 2022/3 due 31 July 2023 - £2,500
When the 2022/23 tax return is prepared you discover that the REAL liability for 2022/23 is £6,000. As you have paid £5,000 on account (£2,500 x 2) the balancing payment yopu will need to pay on 31 January 2024 is £1,000 (£6,000 les £5,000 already paid).
Yes, I understand all of that. 2021/22 - actual liability £5,000
1st POA for 2022/23 due 31 January 2023- £2,500
2nd POA for 2022/3 due 31 July 2023 - £2,500
When the 2022/23 tax return is prepared you discover that the REAL liability for 2022/23 is £6,000. As you have paid £5,000 on account (£2,500 x 2) the balancing payment yopu will need to pay on 31 January 2024 is £1,000 (£6,000 les £5,000 already paid).
Except I think you’ve omitted the fact that the January payment in your example would be the £1,000 balancing payment plus £3,000 payment on account for the next tax year (being 50% of the current year’s £6,000 actual liability). Is that correct?
My question was about the timing of when you file your return, and what effect that has on the July payment if you file before the end of July. We definitely saw the amount due for July this year change shortly after Mrs Oxgreen filed her return in May, and I’d like to understand exactly why that change happened. I think it was because the actual liability for 21-22 was a lot less than the liability for 20-21, hence the payment on account that we made in January 2022 (which was based on the liability for 20-21) was an overpayment - the system changed our payment on account for July 22 to zero.
So is it the case that the July payment on account can go down (if you file early and the liability is reduced, as appeared to happen to us this year), but won’t ever go up if the liability increases?
This is a key question, because the liability definitely will increase next year - the July 23 payment will be based on a rather modest liability carried over from 21-22, but the actual liability for 22-23 will be much bigger. So if we file early, will the July 23 payment increase, or will the system leave it alone and just add a big balancing payment to January 24?
Dr Mike Oxgreen said:
Yes, I understand all of that.
Except I think you’ve omitted the fact that the January payment in your example would be the £1,000 balancing payment plus £3,000 payment on account for the next tax year (being 50% of the current year’s £6,000 actual liability). Is that correct?
No he hasn't omitted anything. Eric has stated your next tax return is ignored for the purposes of increasing your payment on account. It can't be increased due to you filing your next return. In the example the POAs will be a max of £2,500. So file it when you like and you'll just pay based on the 20/21 return. This does not apply if your payments on account need to reduce. Then they will be adjusted down.Except I think you’ve omitted the fact that the January payment in your example would be the £1,000 balancing payment plus £3,000 payment on account for the next tax year (being 50% of the current year’s £6,000 actual liability). Is that correct?
MaxFromage said:
No he hasn't omitted anything.
Okay, then I really don’t understand.Because the official example clearly states that the January payment consists of the balancing payment plus the payment on account, being 50% of the tax calculated from the return just filed.
HMRC site said:
The total tax to pay by midnight on 31 January 2022 is £2,700. This includes:
Which part of the above have I misunderstood?- your ‘balancing payment’ of £1,200 for the 2020 to 2021 tax year (£3,000 minus £1,800)
- the first payment on account of £1,500 (half your 2020 to 2021 tax bill) towards your 2021 to 2022 tax bill
MaxFromage said:
It might be easier if you give us the 20/21 and 21/22 tax due and we'll tell you what you'll pay when.
That would be very cool - I hope also you can "explain your working" so that I understand, rather than simply knowing the answer! Ignoring the pennies, the tax over the last few years is as follows:
19/20 tax due = £1970
20/21 tax due = £1927
21/22 tax due = £637
22/23 tax due = £11000 (anticipated)
We paid £950 in January 22. Mrs Oxgreen's recollection is that the system changed the July 22 payment shortly after she filed her return in May 22, with the result that we paid nothing in July. It is also saying we're still £154 to the good and have nothing to pay in January 23 either.
So by my hazy understanding, the £1927 in 20/21 would have resulted in POAs of £963.50 (half of £1970) to be paid in January 22 and July 22. There must have been a slight overpayment from the previous year, resulting in a negative balancing payment taking it down to £950 in January 22.
When Mrs Oxgreen submitted her return in May 22 showing a much smaller than expected liability of only £637, clearly the £950 paid in January was itself an overpayment. So I think I can understand why the system cancelled the July 22 payment.
The POAs for 2023 would be half of £637, i.e. £318.50. But the system is showing the balance of -£154 with nothing to pay in January. Not quite sure where this number comes from. Our overpayment must have been large enough to wipe out both the July 22 POA and the January 23 POA with more to spare, but I can't quite see it.
I would expect a modest POA of £318.50 in July 23, in the absence of any other adjustment.
But now we get to my question: If Mrs Oxgreen files her return early, let's say May 23 as usual, it's going to show tax of around £11k. Will the system adjust the July 23 payment because the £318.50 POAs are clearly a massive underpayment, or will it keep the July POA the same and apply a very large balancing payment in January 24? That balancing payment would be something like £10,363 (£11k minus £637), plus there would also be a POA of about £5.5k to add to that.
So you can see that there's going to be a very big step up in tax payments one way or another; I'm just trying to understand whether that will happen in July 23 or January 24.
Many thanks for your collective patience while I wrap my brain around this!
Eric Mc said:
Filing earlier has no effect on the Payments on Account. However, if you know that the Payments on Account are going to be too high you can apply to have them reduced to a more realistic level.
I quite often have to do this, or rather my accountant.I tell him my estimate of my next year's reduced earnings and he adjusts down my payments on account.
The benefit of not doing my accounts until November each year.
Much to my accountant's annoyance as it seems all his clients do the same, giving him a very busy run up to Christmas.
Dr Mike Oxgreen said:
But now we get to my question: If Mrs Oxgreen files her return early, let's say May 23 as usual, it's going to show tax of around £11k. Will the system adjust the July 23 payment because the £318.50 POAs are clearly a massive underpayment, or will it keep the July POA the same and apply a very large balancing payment in January 24?
The latter. IIRC, they get sniffy if you reduce the POAs, then pay a big balancing payment. but in this scenario you’re not expected to inform them ‘in advance’. Keep it in a savings account and earn a bit of interest so you’re not tempted to spend it
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