Ok - To keep things simple, I will assume income of £30k per annnum every year and allwance of £10k per annum and a rate of 20% (so £4k per year):-
Start of self employment April 2017.
First Payment January 2019 (2017-2018) = £4k + £2k in advance (for 2018-2019)
Second Payment July 2019 = Second £2k in advance (for 2018-2019)
Third Payment January 2020 = £4k less £4k paid in advance + £2K in advance (for 2019-2020)
etc etc
So although the first year (or at least first payments) seem a bit unfair, after three years less three months, the total paid is £10K being 2.5 years x normal taxable amount???
Ok after another six months the second payment on account os payable which means they would have paid 3 years worth of tax (£12k) in three years four months????
So as long as they understand this and budget for this from day one, it isn't as penal as first thought??
HMRC require you to keep a years tax bill on account, and it is adjusted every year. In your example the client will pay 2k in January and 2k in July thereon, until they cease self employment. They can then claim any overpayment back (1)
If the tax bill for the second year was 6k your client would pay the difference between the two amounts which is 2k to make the bill right + 3k towards the next tax bill, so 5k in January plus a further 3k in July
(1) If you know your tax bill is going to be less the following year you can apply on the self assessment form to reduce the payments on account. I did that one year as the client had ceased self employment half way through the year.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Thanks John - I thought it was correct and am now further confused as both our versions sound the same!??
I understand that if the second year was £6k and the client had already paid £2k in advance in January (along with full payment of year 1) and £2k in advance in July there would be a balancing payment due of £2k and 50% of the £6k...........BUT in my version I have left every year at £4k liability.
So £4k due in year 2 (January), less the £4k advance payments PLUS the 50% in advance of £2k.....then 50% in July of £2k. Meaning that they are one year in advance when they reach July through the third year. Correct???
Yes, I see where you're coming from now, I was thinking in terms of the tax due every year, which is 4k plus the 4k they already have on account, and your 10k after 3 years 3 months I had higher. You were taking into account the 9 months from end of 1st year where I wasn't, sorry.
A lot of people don't realise that the first year they have to pay 150% of their tax the following January, with a further 50% on top in the July. (assuming the tax is more than £1000
-- Edited by Leger on Friday 14th of April 2017 10:49:40 AM
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
