Self Assessment & POA

14 August 2017

This time we’re going to cover Self Assessment tax, payments on account and how much you should keep aside to cover your personal tax bills.We will also discuss what 'payments on account' are.

Note that every taxpayer has individual circumstances and different sources of income, this blog is purely meant as a simple illustration.

The basics:

The tax year runs from 06 April to 05 April.

Self Assessment is always payable 31 January after the end of the tax year.

Payments on account (more on this below) are due 31 January and 31 July after the end of the tax year. These are advance payments for the following tax year.

For the period 06 April 2017 to 05 April 2018 the following payments would be required:

  • Self Assessment tax bill – 31 January 2019
  • First payment on account – 31 January 2019
  • Second payment on account – 31 July 2019

Knowing how much tax to keep aside

First thing – if you’ve not read our 17/18 tax guide then please do so.

Let’s use the following scenario of a limited company owner who is following Option 1 of our tax guide:

Salary from limited company: £11,500

Dividends from limited company: £33,500

Total income: £45,000

Salary

You are entitled to an £11,500 tax free allowance for 17/18, therefore your salary is tax free. PAYE and NI is paid monthly through your limited company so you don’t need to worry about keeping any tax aside.

Dividends

For 17/18, your first £5,000 of dividends are tax free. This means the amount of dividends you’re paying tax on is £33,500 - £5,000 = £28,500.

For total income up to £45,000, dividends are taxed at 7.5%. Any dividends you take out that push you above £45,000 total income are charged at a massive 32.5% tax. It is important to be tax efficient!

Your tax bill is simply calculated as £28,500 * 7.5% = £2,138 and is due for payment on 31 January 2018.

However….

Payments on account

In an effort to get money up front from taxpayers and make sure tax bills get paid, HMRC requires you to make two “payments on account”.

The two payments on account are equal to 50% of your Self Assessment tax bill and count towards next year’s tax bill.

Our tax bill is £2,138 and therefore the two payments on account are as follows:

  • 50% * £2,138 = £1,069
  • 50% * £2,138 = £1,069

Total amount required to keep aside for personal taxes

Following on from our 17/18 example, the following amounts would be due to HMRC:

  • Self Assessment tax bill – 31 January 2019: £2,138
  • First payment on account – 31 January 2019: £1,069
  • Second payment on account – 31 July 2019: £1,069

Total payable on 31 January: £2,138 + £1,069 = £3,207

Total payable on 31 July: £1,069

This means that out of the £45,000 income you’ve drawn, you would need to keep aside money for the Self Assessment tax bill and both payments on account which comes to £4,276 or roughly 11% of £45,000.

Remember the payments on account are an estimate of next year’s tax bill and HMRC are simply collecting the cash in advance.

Do you always have to make payments on account?

Only if your tax Self Assessment tax bill is over £1,000. Due to the tax on dividends, nearly all our clients will have to make payments on account.

What happens if you have a much lower tax bill next year?

Then you get a refund of the excess. For instance, if your payments on account were £1,000 in total and your tax bill was £900, you would receive a £100 refund.

Do you require additional information on self assessment?

Follow this link to contact the team at Source Accounting to find out more

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