HMRC Self Assessment Payments on Accounts – what are they all about?

To any self employed person, HMRC payments on account are illogical and confusing. Here we will clarify how the system works and how to remain compliant with HMRC’s odd rules! In a nutshell, this is a basic tax calculation: Taxable income £xxxxxx Less tax free personal allowance £xxxxx Tax on income at xx% £xxxxx Tax payable for the year in question £xxxx But where it becomes more complex is if your total tax liability for one year is more than £1,000. HMRC will assume that your income for the coming year will be equivalent to the year just calculated. Therefore you need to pay one half of the total liability in advance! This is HMRC payment in advance. Let’s give a practical example or two… Example One Jane Doe earns £20,000 of profit from self employment. Taking off her personal allowance of £11,000 leaves her tax payable on £9000 at 20%, being £1800. Assuming this is her first year of trading the amount she must pay in the January following the end of the tax year is the £1800 PLUS another £900. Then in the following July she must pay another £900. This means that if her tax bill for the next year is also £1800 she will have paid it already, but will then need to pay two lots of £900 for the NEXT tax year in the following January and July. Example Two Joe Bloggs earns £13,000 of profit from self-employment. Taking off his personal allowance of £11,000 leaves £2,000 on which tax at 20% is £400. This £400 must be paid to HMRC in the January following the end of...