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When you start working for yourself either as a sole trader or contractor, one of the first benefits you will notice is that you’re not paying tax every month on the income that you receive. Unlike the employee PAYE system where tax and national insurance is deducted at source, you will be asked to pay your contributions at different times of the year.
Your first tax bill will be due on the 31st January following your first year of trading. For example, if you started trading in August 2017, you wouldn’t need to pay tax until after the 2017/2018 deadline for self-assessment, which would be January 2019.
It can be a benefit to be working this way however be aware that you may be shocked when it comes to tax payment time if you have not allocated funds to pay the tax bill throughout the year.For those people who pay most of their tax through the self-assessment system, HMRC use a ‘payment on account’ system. If you have other employment where more than 80% of your income is taxed through PAYE, or you are working as a contractor within an umbrella company, this will not apply to you. Also, if your tax bill is more than £1,000 you will need to pay on account.
This means that you will be required to pay your first £1,000 tax bill by 31st January, then going forward you will be required to pay 50% of the next expected tax bill by 31st July, ready to pay the balance again by the following 31st January.
Once you get past the initial outlay of the first tax payment, the rest should become habit and is a better way to budget for tax payments. But it does mean that it’s better to submit your self-assessment forms as soon as possible to avoid any nasty surprises!
If you are unsure how to manage your tax payments or completing your self-assessment, you could benefit from an accountant who can walk you through each stage, and even complete for you if preferred.
Late PaymentsBe careful. Many self-employed people are not aware of the Payment on Account system and finding the initial outlay of funds can be hard to find. However, you will be charged a penalty fee or interest if payments are late or underpaid. This can happen if you your tax bill is higher or lower than expected. If you overpay, HMRC will send you a tax refund, however if you underpay, you will be charged interest.
You can check your self-assessment status by simply logging into your online account and clicking ‘view statements’. It will show you the payments you have already made and payments you need to make towards your next bill.
Here at 2020 Accountancy, your business is our business and we want to make your working life as straightforward as possible. If you’re new to self-employment and need advice on what’s the best practise for you, feel free to get in touch, we’d be happy to help.