Freelancing and contracting professionals who do not work via PAYE Umbrella Companies are being warned that, if they are new to tax Self-Assessment, they may have to pay additional money toward their next tax bill by the January 31st deadline.
The warning comes from the Low Incomes Tax Reform Group (LITRG) and highlights the importance of being fully aware of HMRC’s “Payments on Account” (POA) policy. These are payments toward the coming year’s income tax and Class 4 National Insurance Contributions for self-employed individuals.
The payments will be required when the tax bill for 2016/17 exceeds £1,000, the threshold for POAs for 2017/18.
Contractors working as Umbrella Company Employees will be unaffected, as their tax and NICs are paid automatically on a PAYE basis. Also unaffected are the people who have in excess of 80% of their income taxed at source, for instance via PAYE or the Construction Industry Scheme (CIS).
The POA amount due is calculated by dividing the 2016/17 tax bill by two, although any student loan repayments, capital gains tax liabilities and Class 2 NICs are not included in the tax bill. The resulting POA is payable in two instalments: one by 31st January 2018 and the second by 31st July 2018.
Sums are submitted in advance as POAs are deducted from the total due in the next tax return. If an outstanding tax amount remains after POAs have been deducted, it will need to be paid in full as a “balancing payment” by the end of January 2019. If, however, already-submitted POAs turn out to be in excess of the actual tax bill for 2017/18, the HMRC will refund the difference.
Explaining that POAs were intended to help people spread out their tax bill, LITRG Chair Anne Fairpo warned that they were easily overlooked, especially by newcomers to Self-Assessment, who often fail to include them when they are budgeting for their first tax bill. Many are then shocked when they are required to pay additional money.
“If you think your tax bill will be less for 2017/18 than 2016/17 because (for example) you had less self-employed income, then it is possible to ask HMRC to reduce your payments on account.
“You need a reasonable estimate of the amount you will owe in 2017/18 in order to reduce your payments on account. If you reduce them too much, you could face interest charges, and even a penalty if the claim was fraudulent or negligent.”
People unable to pay their POAs must notify HMRC immediately and discuss options such as more time to pay or setting up a budget payment plan to spread the owed sum out even further.