Tax Questions and Answers
I’m told I will need to make a payment on account in July. What is this?
When you receive income from PAYE, tax is deducted from each payment throughout the year. When you have income outside PAYE, from such things as self-employment or rent from property, then you pay your tax on that income in arrears. The amount due is determined as part of preparing a tax return. Payments on account are a means for HMRC to get tax in earlier before a return has been completed.
Payments on account are due on 31st January and 31st July each year. These are payments towards the tax year ending between these dates. (So payments on account on 31st January 2018 and 31st July 2018 go towards the tax liability for the year ended 5th April 2018)
Why do I need to make a payment on account?
The trigger to making payments on account is the submission of a tax return, with the amount of tax due determining the position. This is not simply the total amount of tax due on your income for the year, but the balance still payable after accounting for tax deducted at source. For most people, this would be PAYE tax taken from wages income, though there may be other reasons. If more than 80% of your total tax bill is deducted at source, you will not need to make payments on account regardless of how high the balancing amount is. If not, then a balancing amount of over £1,000 will result in payments on account being due.
Payments on account are based on the assumption that your taxable income is relatively steady year on year. Accordingly, each payment is 50% of your balancing liability, in the belief that this will closely match the amount due the following year. As generally a one-off tax bill rather than a recurring one, tax arising from Capital Gains is not included in this figure.
But my income isn’t steady!
Unsurprisingly payments on account rarely, if ever, match the tax due for the following year. If the tax for the following year is higher, then the balance is due the following 31st January. If the tax for the following year is lower, then the excess amount paid will be refunded.
If you know that your income for the following year is going to be lower, then you can reduce your payments on account accordingly. This can either be done through the tax return when it is submitted, or through a later separate application to HMRC. In either case, you will need to supply a reason why you are reducing payments on account, and the revised figure to be paid. The reason does not have to be detailed, and can be as simple as a general reduction in self-employed income.
However, before you rush to reduce your payments on account, you need to consider carefully. If the final tax bill is actually higher than your reduced payments on account, then you will be charged interest on the difference. This will run from the date the payments on account were due (31st January and 31st July) to whenever the balance is cleared.
If your income is higher in the following year, there is no requirement to increase payments on account to match. You will also not be charged interest on any additional amount due.
Setting money aside
It is important to make sure you have funds available to pay your tax liability when it falls due. This is especially true in the first year of completing a return. As you will not have made payments on account before, you could find yourself having to pay 100% of the tax for your first return plus 50% for the following year at the same time. This can easily catch out those new to filling in returns.
If possible, setting aside approximately a quarter of your profits should ensure that you have sufficient funds available. If your income is high enough to go into higher rate tax, then you should increase this to about a third.
I have a tax credit renewal form to complete, but I haven’t got around to doing my tax return yet. Is this a problem?
Ideally a tax credit renewal form should include up to date figures on it. This ensures that the subsequent award is accurate.
However, as the tax credit renewal date of 31st July 2018 is well in advance of the tax return filing deadline of 31st January 2019, it is entirely possible you won’t have the figures ready to hand. In this case, it is possible to submit the form using estimated figures instead. Failure to submit any figures before the renewal deadline could result in your tax credits being stopped entirely.
You should try to make your estimates as accurate as possible. If your estimate is too high, you risk missing out on tax credits you were entitled to. If it is too low, you risk having the tax credits you have received being clawed back at a later date.
Whenever you compile the actual figures, these need to be submitted to the Tax Credits Office as soon as possible. This should be done no later than the tax return filing deadline of 31st January 2019.
Having had benefits in kind to report in previous years, I told HMRC through RTI that I would be sending P11Ds to report them this year as well. Having reviewed my files,
I note we no longer have benefits in kind. Can I ignore the end of year expenses and benefits form P11D(b) HMRC have sent me?
You cannot simply ignore this form. As HMRC are now expecting a report from you, failure to make a submission will result in them viewing you as in breach and subject to late filing penalties.
You will need to take action before the normal filing deadline of 6th July. Fortunately this matter can be resolved in two fairly simple ways. If you have an HMRC online account you can login and complete a form to tell them nothing is due. Alternatively you can tick the similar option on the paper form you have been sent and send that back instead. If you take the latter route, ensure you post the form in plenty of time to meet the deadline.
Historically, I have taken a small salary and steady dividends from my company. This year, having had a successful period of trade, I decided to treat myself and took a large extra amount out. Will there be any tax consequences to this?
If the company already owed you more than this amount, perhaps due to cash invested
into it, there is nothing to worry about. Otherwise the assumption is that the extra amount you have taken out has simply been treated as a loan to you, rather than additional dividends. If the amount was treated as dividends, there will be additional income tax due as normal.
Taking a loan out from a personal company has two possible tax consequences.
The first depends on whether the loan exceeds £10,000 at any point during the year. If it does, and you do not pay interest on the loan at the official rate (currently 2.5%) or higher then the loan is considered a benefit in kind. This will result in you having a personal tax liability and the company will also have to pay Class 1A NIC on the value of the benefit. HMRC provide a form for working out this value. (tinyurl.com/y8tbgrj5)
The second takes effect no matter what the value of the loan. As part of its corporation tax charge, a company is required to pay 32.5% of the balance of any such loan at the company year end. If the loan is repaid within 9 months of the year end, then this tax charge can be avoided. However, this effect of repayment is cancelled for any amounts loaned out again within 30 days of repayment. Any tax paid under this rule is reclaimable in the year the loan is repaid.
• For assistance with these, or any other tax or accounting matters, call Steve Brown at Coleman Webb on 01424 211800 to arrange a free, no-obligation appointment to discuss your needs.
Disclaimer: Advice shared in this article is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
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