In January, many individuals face a crucial annual deadline: the Self Assessment. By the 31st of January, those eligible must submit their Self Assessments to HMRC, with payments due on the same day and again on July 31st.
It is a good idea to set aside funds monthly to ensure timely payment of your Self Assessment when the tax deadline approaches. However, this can be challenging at times.
For those transitioning from traditional employment to self-employment or directorship of a limited company, the responsibility of paying Self Assessment twice annually may be unfamiliar. Unlike in employment where taxes are deducted at the source, self-employed individuals need to organize their own tax payments.
The festive season's financial pressures sometimes result in inadequate funds to cover the Self Assessment bill calculated based on the previous tax year's income, minus any prior payments on account.
Failure to pay Self Assessment by the deadlines incurs penalties:
30 days late: 5% of the tax owed at that date.
6 months late: An additional penalty of 5% of the tax owed at that date.
12 months late: Another penalty of 5% of the tax owed at that date.
Late payments should be avoided, especially if you are already struggling with the existing bill.
Understanding the calculation of Self Assessment and exploring options in case of financial difficulty is crucial. Those eligible for Self Assessment include the self-employed, directors of limited companies, individuals with un-taxed tips or commissions, landlords, side business operators, high earners, UK residents earning income overseas, and those making taxable gains on asset sales.
The Self Assessment tax bill is typically split into two payments due on January 31st and July 31st. Calculations involve adding taxable income sources, deducting allowable expenses, capital allowances, other allowances, and personal allowances, with the relevant tax rate applied to each income source.
Self-employed individuals with profits exceeding £12,570 may also have to pay Class 2 and Class 4 National Insurance. Directors of limited companies are considered 'employees' and must pay National Insurance on annual income over £12,570.
Payment on account is a commonly misunderstood aspect of the Self Assessment process. If the total bill for Class 4 National Insurance and Income Tax exceeds £1,000 per year, a payment on account is required, serving as a pre-payment toward the next year's bill.
If unable to pay on time, individuals can request a Time to Pay arrangement from HMRC, allowing debt repayment in monthly installments based on personal circumstances.
Alternative strategies include asking employers to adjust tax codes for monthly deductions or facing penalties for late filing or payment. Seeking advice from experts can help choose the right solution and avoid future difficulties.
Setting up a payment plan with HMRC is advisable for those unable to pay on time, with options available for debts of £30,000 or less, up-to-date tax returns, and contact made within 60 days of the payment deadline.
Late filing incurs a £100 penalty, with additional charges for further delays. Interest accrues on late payments, making early communication with HMRC crucial.
Individuals have the right to appeal against penalties with valid reasons. Seeking advice and assistance from professionals can help navigate the complexities of Self Assessment and ensure accurate calculations, preventing unpleasant surprises in January and July.