Contractors, don't miss the summer tax deadline
Tax is probably far from most contractors’ minds as the summer holidays get underway and many of us attempt to steal a few days away from our desks, writes SimpleTax director Amanda Swales. After all, the self-assessment tax deadline is in January, right? And the new year feels like a long way away.
Well no, not quite. You should actually make a payment to HMRC before this month is up. Too many contractors forget that income tax is paid in two portions, bringing costly consequences for those who miss the deadline. However, meet your obligations, and ‘payments on account’ can save you money in the long-run.
Let’s look closer at the summer tax deadline, and explore why paying now could mean paying less when January arrives.
Paying on account: the basics
The January 31st deadline is a yardstick everyone knows about: it’s there for calculating your earnings, dividends and expenses, as well as submitting them to the taxman. In this payment, you settle any outstanding tax on your account, plus an upfront payment for the year ahead.
But you don’t pay it all at once. There is another deadline -- July 31st -- that demands a second payment for the current financial year. Miss the cut-off at the end of the month, and a 2.75% interest penalty will start to accrue on your account!
Both payments are based on what you earned last year, instead of the current state of your finances. That’s because HMRC can’t predict how your income is going to fluctuate; it’s assumed that you’re bringing in the same, every trading period, even though that’s probably not the case.
It’s okay though -- that’s what rebates are for, if you’ve paid too much before self-assessment day. What’s more important is getting your head around how paying on account functions, and avoiding the common tax return pitfalls -- more on those later.
Splitting up your responsibilities
Let’s say that you owed £5,000 income tax in 2015/16. HMRC doesn’t currently know what the 2016/17 amount is. You’ll compile it by January 2018 so, for now, all they have to go on is your previous liabilities (£5,000). That figure is divided in two: £2,500 is paid in January, £2,500 in July.
But of course, your income may have risen or diminished from 2015/16. Let’s imagine you’ve had a good year, and really owe £6,500 for 2016/17. That extra £1,500 is added to the final January cost in 2018. You’ll then pay £3,250 the following July, and the process is repeated.
Monitoring your tax status
You can miss the July deadline, but it’ll add a steady interest rate to the amount you’ll pay in six months’ time. Tax return software -- or a pro-active accountant -- will keep you on top of what’s happening with your revenue and expenses, and ensure you don’t get caught out when the deadlines arrive. The best software doesn’t even blink when you move from contract to contract and want to input earnings accordingly. More to come on that too.
As is hopefully clear by now, payments on account really are half the battle when it comes to understanding your tax return obligations. But the returns themselves can still trip contractors up. So before you congratulate yourself for being ready to make the first of two important tax deadlines, check you aren’t:
Forgetting to record each gig’s income
It’s not uncommon for contractors to move from one placement to another on an almost monthly basis, so it’s important to remember that with every new contract comes a new set of tax rules and implications. This is why it’s so crucial to record every penny of income from every stint you do -- regardless of whether its duration is a few months, a week or even less.
Going rogue with receipts
For a hefty chunk of its practitioners, contract and freelance work involves the accumulation of many, many receipts. You’ll need to make sure you keep all receipts in order to monitor your spending and generate an accurate picture of your tax liabilities. We recommend using software instead of a shoe-box!
Losing your sense of liability
As a self-employed professional with multiple clients over the course of the year, it can be difficult for a contractor to gauge their financial position. But failure to monitor your tax liabilities can spring a number of nasty surprises when July 31st and January 31st roll around, especially if you’ve not saved enough for your tax bill.
The above really are the three mistakes we see contractors commonly make with tax returns. Oh, and the fourth is thinking that January is the only time they have to ‘do’ their taxes; it’s not; there’s another time -- and it’s now.
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