When is my tax due?
If you run a small business which is not incorporated (not a limited company) it is important to know how much your tax will be and when your tax payments are due.
This is not an easy subject to explain, let alone understand, which is why you should have a good relationship with your accountant. Your accountant should know your business inside out and should be maximising all claims on your behalf in addition to letting you know, well in advance, of all tax liabilities that are becoming due.
That said, it is important that you also broadly understand how your tax payments are calculated because without this knowledge, it is difficult to plan your cash flow.
In this blog I will attempt to explain how tax works for the self employed.
Accounts and my “adjusted profit”
The profit in the accounts is only part of the story. There are likely to be some deductions that are not tax allowable so your accountant will have to adjust this figure for the tax man. The following items may have been deducted in your accounts but they are not tax deductible and will need to be added to the profit that is sent to the tax man:
- Depreciation (and some amortisation)
- Private element of expenses (such as motor and phone etc)
There are also some items of expenditure that will not show in your profit and loss account but nevertheless are still tax deductible and will be deducted from the profit that is sent to the tax man. These items can be some or all of the following:
- A new vehicle
- An item of plant
- Pension payments
It’s all about timing
Your set of accounts will have a year end which falls on or before the the 5 April. Your accountant will already have worked out your “adjusted profit” for that particular year. This “adjusted profit” is the profit that is sent to the tax man and is also added to any other income that you may have in the period to the 5 April. Any personal allowances (together with any other available personal reliefs) will be deducted too. For convenience, let’s now refer to this as your “taxable income”.
Your “total tax bill” will be calculated on your taxable income and the “balance” will be due by the 31 January following the 5 April tax year end.
If only it were that simple! It is likely that you have already paid two “payments on account” (unless you are a business start up or had low “taxable income” in the previous year which we will come to later). If you have already paid two payments on account, they will be deducted from your total tax bill leaving either a balance to be paid or refunded.
How are “Payments on Account calculated?”
Payments on account are calculated very simply. The tax man takes the previous year’s total tax bill and halves it to arrive at this years’ “Payments on Account” (as will this years’ tax bill set the level for next years Payments on Account).
When are “Payments on Account” due?”
The first Payment on Account is always due on the 31 January. The second Payment on Account is always due on the 31 July.
So what can cause a problem?
Fluctuations cause problems.
If your taxable income falls from one tax year to the next, the tax on the high taxable income year will become due when funds are stretched. The opposite can also cause a big problem.
However, a common event that will also cause this effect and is often overlooked, is the purchase of a new commercial vehicle or item of plant in one year and not the next.
Let’s take a business with low taxable income for the year ended 31 March 2018 and high taxable income in the year to 31 March 2019. Very little tax will have been paid for the March 2018 year (which is good) but a secondary result of this low tax is that the Payments on Account for the next year end will probably be too low. This means that most of the tax for the 31 March 2019 year will be due in January 2020 (because very little will have been paid on account the previous January and July) and the problem gets worse because the first payment on account for the next year to 31 March 2020 (which will now be high again) becomes due on the same date and then six months later the second payment on account (which will also be high) will also become due.
The result is that two year’s worth of tax bills can crystallise in the space of six months (a large balance that also triggers two large Payments on Account), simply because of the absence of, or low payments on account due to the previous low tax year.
Keep up to date with your records and know where you stand financially. This way you will never be caught out. The best way to achieve this is to use all the tools that are available and keep in contact with your accountant. If you are not using or maximising the usefulness of cloud accounting products such as Xero, I would recommend that you read our post here