As the festive season fades into the past, thousands of UK households, especially self-employed workers, are preparing for what experts are calling “brutal” tax bills landing imminently from HM Revenue & Customs (HMRC). For many, the impending January 31 deadline means hefty payments that could amount to 150% of their previous tax owed.
Self-employed individuals are required to file their Self Assessment tax returns and settle any outstanding tax by January 31 each year. However, under HMRC regulations, many must also make advance payments toward their tax liabilities for the upcoming year, known as Payments on Account.
Robert Salter, Director of Global Mobility at Blick Rothenberg, explains: “Self Assessment tax returns are income tax filings that individuals, such as the self-employed, must complete when they have income or capital gains. Payments on Account are advance payments towards future tax liabilities, based on the underpayment from the taxpayer’s previous filed accounts.”
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Payments on Account serve to spread the tax burden over two instalments, each typically half of the previous year’s tax bill, including Class 4 National Insurance contributions for the self-employed. These instalments must be paid by midnight on January 31 and July 31.
However, Payments on Account are not required if the tax owed last year was less than £1,000 or if more than 80% of the tax was already collected through other means, such as a tax code adjustment or savings interest deductions.
Taxpayers can view the required payment amounts on their Self Assessment statement or online HMRC account. It’s important to note that these payments are calculated on estimated earnings, usually mirroring the previous year’s income. If actual earnings surpass these estimates, a ‘balancing payment’ may be due to cover the shortfall.
With these complex rules and significant sums due imminently, many self-employed individuals are bracing themselves for a financial shock as the January deadline approaches.