Contractors' Questions: What are Payments on Account?

Contractor’s Question: In terms of self-assessment correspondence from HM Revenue & Customs, what are Payments on Account? My accountant has sent me a short message asking me about it, but I’m none the wiser.

Expert’s Answer: Payments on account are one of the main issues on contractors’ minds and it often crops up, sometimes unexpectedly, from having reviewed your personal tax return.

That’s because the bill you receive from HMRC might be for more than one year’s tax. To explain, if you meet the required criteria, you may have to pay all of your tax for the last tax year and 50% of the tax for the current year as well. The remaining 50% of the current year’s tax bill would then be paid by 31 July.

This issue can seriously impact your cash flow if not expected and typically, confronts first-time contractors and those new to contracting.

But I would advise you not to just accept that the payment on account is correct, as this is just an estimate from HMRC. So if you believe the tax bill for the current year will be lower than that of the previous year, you can reduce the payments on account. 

To do this you need to have visibility on your current year’s tax position as if you reduce the payments on the basis your income has dropped -- and it transpires that this is not the case -- you will be charged interest.

How can this be managed? The key to managing these tax bills is to have the necessary financial information available to you as a small business owner.  This information should cover both company and personal tax and should be something your accountant can help you with without charging you additional fees.

The expert was Matthew Fryer of Brookson, an accountancy firm specialising in the tax affairs of contractors, freelancers and the self-employed.

 

 

Monday 17th February 2014