New to business? Beware of payments on account!

14th November 2017

 

When setting up in business you will be fully aware that you will have tax to pay on your profits, and you will ideally be putting money aside to cover this. What you might not be aware of is that you may have to pay two years’ worth of tax in just six months.

 

The first time your tax liability exceeds £1,000, assuming that 80% or more of your tax liability isn’t collected at source (i.e. deducted from a salary), you will be required to make payments on account for the following year’s tax liability.

 

Although the payments on account are deducted from your liability in the following year, meaning the overall tax you pay remains the same, payments on account can cause significant cash flow issues the first time you are due to pay them. The easiest way to demonstrate this is by way of an example:

 

Example                                                                              POA’s due                           POA’s not due

2016/17 Tax liability                                                       £1,100                                   £900

1st POA for 17/18 (50% of 16/17 liability)                    £550                                      N/A

Total due 31st January 2018                                          £1,650                                   £900

2nd POA due 31st July 2018                                            £550                                       N/A

 

As you will see, although there is only a £200 difference in tax liability in the above examples, the example in which payments on account are due will pay a total of £2,200 between 31st January 2018 and 31st July 2018 compared to just £900 for the example where they are not due – a difference of £1,300!

 

The above situation could also affect you if you operate through a limited company and take dividends from the company which push your tax liability over £1,000 for the first time.



 
Other items in Blogs
 
Lucy Bayliss
11th April 2019 £10 a day from the 1st May!

If you submitted your tax return after the filing deadline of 31 January, or you still have not submitted your tax return, then you will automatically be fined £100 for missing the deadline.   In February, HMRC announced that they would be delaying issuing the late filing penalty notices due to Brexit. They have now…

Read More »

Matilda Mawson
10th April 2019 Has your claim for marriage allowance transfer been refused?

  HMRC have recently attempted to remove a marriage allowance transfer for a couple, where the transferor had less than the 10% personal allowance unused. This treatment is incorrect as outlined below:   Background to the transfer The marriage allowance transfer was introduced from 5 April 2015 onwards and allows a person to transfer 10%…

Read More »

Lisa Smith
9th April 2019 Digital Records for VAT – HMRC Guidance published

  From 1 April 2019, most businesses with a taxable turnover above £85,000 are required to follow the rules for Making Tax Digital for VAT.  As a result, HMRC has published new guidance on record keeping, which  explains what records a business needs to keep digitally if it has signed up for Making Tax Digital…

Read More »

Ian Piper
9th April 2019 R&D Tax Relief: HMRC Try to Tackle Abuse

  Many companies, not just those in the tech industry, will have benefitted from the generosity of R&D tax relief. Eligible R&D expenditure can be inflated by a notional 230% uplift, and a refund of tax claimed on tax that was never paid in the first place. Perhaps not unsurprisingly, HMRC have identified abuses of…

Read More »

Adrian Mackenzie
25th March 2019 When doing nothing is best

From time to time, stock markets go through periods of uncertainty. This could be down to some poor economic news or perhaps due to a political crisis.  The sharp falls that can be experienced at such times are understandably unsettling for investors. They can even tempt some to change their long-term plan by selling their…

Read More »

Thomas Carter
21st March 2019 Preparing for Brexit – Do you trade within the EU?

Your UK business may need an Economic Operator Registration and Identification (EORI) number if we leave the EU with no deal.   What is an EORI number?   An EORI number is a unique identifying number assigned to individual importers and exporters to track trade between the EU and non-EU countries. It’s used during Customs…

Read More »