Sometimes you may notice that after you have completed your tax return and submitted by the 31st of January, HM Revenue and Customs (HMRC) may ask you to pay an amount of tax that it is much higher than you calculated.
If your tax bill for the year amounted to more than £1,000 you would be subject to pay payments on account. This is where HMRC estimate that you will be paying the same amount of tax next year and want you to pay it up front. This is normally done as half paid on the 31st of January with your current tax bill, which explains the higher amount of tax to pay and half on the following 31st of July with any remainder to be paid on the following 31st January.
For example, if you complete your April 2014 accounts and have £1,500 tax to pay, you will have to pay your £1,500 on the 31st of January 2015 along with £750 for the April 2015 tax year, making the total payment on the 31st of January £2,250. You would then pay £750 on the 31st of July, and if your tax bill for April 2015 is more than £1,500 you will pay the remainder on 31st of January 2016 along with the payment on account for the April 2016 tax year.
Luckily this system works both ways, if you in fact have to pay less tax than the previous year, the difference can be claimed back on your tax return so you know you won’t be overpaying any tax. In addition, if you know beforehand that your business is not doing as well as the previous year, you can apply to HMRC and have the payments on account reduced accordingly.
However, if at least 80% of your tax has been covered by tax deducted at source, such as from employed income or dividends, you will not have to worry about payments on account, even if your total tax bill is higher than £1,000.
If you require any advice or assistance with the above, completing your tax return, or with claiming back tax owed to you by HMRC, please do not hesitate to contact us.