Following on from the recent post on how tax returns are completed, looking through Bectu’s ‘Tax for Freelancers’ today (with prompting from a colleague – thanks Sean!) I was reminded of an important factor that people need to bear in mind when doing their first tax return.
It all reinforces the general message that – if you are moving into self-employment, do your tax return as early as possible to avoid surprises.
Imagine it’s November 2021. You are completing your first tax return for the work you did and was paid for, in the tax year 2020-1 (which ended on the 5th April 2021).
You have done the sums already – (perhaps using HMRC’s calculator) and you earned (say) about around £28k in profits after you’ve deducted your working expenses and you’ve worked out that you are going to have to pay about £3k in tax and another £1.8k-ish in National Insurance Contributions (Class 2 and Class 4).
So when it comes around to payment, you are going to need to budget about £4.8k to pay HMRC, right?
Because tax is collected in arrears, HMRC also ask you to make a ‘payment on account‘ – to pay a percentage of what you will be expecting to pay next year on top of what they know you owe them already in their tax return – and you will have to make a further ‘payment on account’ the following July!
It all works out correctly in the end, but you can sometime end up paying more tax, earlier, than you need to, and if you think this is going to happen, you can request a reduced payment on account – see here for advice on how to do this.
There’s a worked example on p16 of the current Tax for Freelancers (“Maria”) but all of this reinforces the message: Avoid unpleasant surprises by doing your tax return asap!!