If you’re self-employed, have a form of untaxed income, or are a director/shareholder of a limited company – you’ll need to know how and when to complete your annual self-assessment. You must also be aware of payments on account, how to use these to manage your tax bills and how you can adjust your payment term if you need to spread out your tax payments due to COVID.
What is self-assessment?
Self-assessments are for reporting various forms of untaxed income to HMRC and paying tax on said income. They’re also known as personal tax returns.
You’ll need to submit a self-assessment if the following apply to you:
- You are self-employed or a sole trader
- Your annual taxable salary is over £100,000
- You’re the director of a limited company and pay yourself dividends
- You receive income from a rental property in the UK
- You receive income from other savings and investments
- You receive other untaxed income specified by HMRC
The deadline for paper returns is 31st October for the previous tax year (6th April to 5th April), and online returns are due by 31st January.
You can submit paper or online self-assessments on your own, or you can appoint an accountant to assist you with the completion and submission.
What is a Payment on Account (POA) and how does it work?
A payment on account (POA) is a twice-yearly advance payment towards your annual tax bill – this includes Class 4 NICs for the self-employed.
You are required to make two payments on account each year unless:
- Your last tax bill from your self-assessment was less than £1000
- You have already paid more than 80% of all the tax you are due to pay
Payments on account are calculated at half your previous year’s tax bill. The payments are due by midnight on 31st January and 31st July respectively.
Payments on account be confusing, so it is important to check the figures and log in to your online HMRC account regularly to ensure you are up to date on what you owe.
Your tax bill for 2018/19 was £2000. Your payments on account towards the 2019/20 tax year would then be £1000 each, due on 31st January 2020 and 31st July 2020.
If, for example, your tax bill for the 2019/20 tax year turns out to be £2500 but you’ve already made two payments on account totalling £1000, you will also need to make a balancing payment of £1500 to finish paying for your 2019/20 tax bill. Both the balancing payment of £1500 and the payment on account for next year (half of £2500, which would be £1250) are due by 31st January 2021. Another £1250 would be due by 31st July 2021.
Your tax bill and payments on account are calculated when you submit your self-assessment. Bear in mind, payments on account do not include capital gains liabilities or student loan repayments.
Can you pay less than half your previous tax bill for the payment on account?
Payments on account can be frustrating for many who may have fluctuating income year-on-year. Luckily, if you believe you will owe less tax next year or will earn less, you can apply to have the payment on account reduced. You can apply for this online via your HMRC account, or submit form SA303.
What if your ability to pay has been affected by COVID-19?
Those who were having trouble making their payments on account for their 2019/20 tax bill due to COVID-19 had the option of deferring their July 2020 payment on account until 31st January 2021 – when self-assessments are due for the tax year 6th April 2019 to 5th April 2020. If you deferred your July payment on account, you would need to make your balancing payment for 2019/20 on 31st January 2021 as well as make your first payment on account for next year’s tax bill.
If you believe you will struggle to pay the remainder of your 2019/20 self-assessment bill, you can apply to set up an instalment arrangement with HMRC if you meet the following conditions:
- You do not have any other payment plans or debts with HMRC
- Your tax returns are up to date
- It’s less than 60 days after the payment deadline for your tax bill
In other words, as long as everything else is up to date with HMRC and you’ve filed your self-assessment for 2019/20 you should be able to set up an instalment plan. If you owe more than £30,000 in tax, you will likely need to contact HMRC directly to set this up rather than apply online.