Self employed - tax man wants money in advance - is this right?

The self employed have been having to do this for years and "how" is answered by saying your advance payments are based on the previous year.

And no, it is not "fair", especially so when you have a good year followed by a lean one although you do have the option to apply to have your advance payments reduced but I believe this leaves you open to a penalty if you get it wrong.

I don't share the view that it's unfair.

The "advanced payments" (aka "payments on account") are payable 31/1 in the tax year, and 31/7 following the tax year. Unless your accounting year-end falls between 1/2 and 5/4, nothing is paid in advance of earning the profit. And even if your yr-end does fall between those dates, you've made at least

But more important, almost certainly either the OP's post is wrongly phrased or his accountants are wrong.

For there to be dividends, this must be a Ltd Company, and POAs don't apply. So the only explanations I can imagine that fit the scenario are (a) that the OP is in the higher (40%) tax band and 2% divs represent a "fairly sizeable" sum - which is not comparable to the previous year's divs; and/or (b) he has other significant income not taxed at source at the HR. It cannot be an IR35 issue, since that would not be payable in January.

OP back again.

Not sure where 'profit' comes into the discussion. We are not talking the corporation tax, but personal tax. Do I work for a profit - of course- who works and does not take money home (cant see many people paying somebody to work for them).

As for the other other questions... yes, I would be a 40% tax payer but just below thanks to the dividends, and yes, its a Ltd company. Its not a IR35 issue - just the first year of having to pay like this in advance - every other year has been on a PAYE (monthly) basis.

It's what the self-employed are taxed on - and also what CT is based on.

An unnecessary comment, which belittles you. My reference to profit was in reply to Yellow. If you want to get tax right, leave emotion outside.

That does not compute, as they say. Yes, at that level there is a band of profit for which the salary route can be taxed less than the div route, but only within a very narrow band.

In which case (and assuming you've given us the whole picture) change your accountants. First, they're wrong about POAs. Second, they've got you paying yourself vastly too much in salary (nearly into the HR band!!) and too little in divs, hence you're being screwed on NI (ERs and EEs) as well as tax. Unless there's something very unusual about your circumstances, a salary above c.7.5k is costing you dear in tax & NI.

HTH

It all depends on how regular your work, or more importantly your income, is.

The nature of self employment means that not everyone receives their income on a monthly basis (like a salary) or even have repeatable income year on year and this means that you are called upon to pay tax on money that you are yet to receive or even on "income" that you will never receive.

Paying income tax on money that you have not actually received as income is simply not "fair" in my view but that's just my opinion.

So unless you are a high earner, with plenty of surplus in the bank regardless of the peaks and troughs of your business then the accounting year is of no consequence.

You don't seem to have read what has been said. If there are reasons why the payments on account are too much then you can apply to have them reduced.

The 31 January POA is only for 50% and if you haven't received 50% of your income after 75% of your accounting year it is a very strange business. What business are you in?

Peter

If you think that, then you have not read what I said. :-)

Indeed you can, but if by the end of the year you have ended up earning more than where covered by your reduced payments you will be penalised.

I am not self employed any more but I used to be until a couple of years back, and I am an engineer. Some jobs could last a year or more and I would not receive the bulk of my money until the end of the project.

Of course you should only reduce your POA to what they should be not what you would like them to be.

That is a crazy situation. If that was the situation it may have been worth talking to your inspector and ask them to allow you to prepare accounts on an invoiced basis rather than WIP.

Peter

house/consultancy

Which I think is where we came in. :-)

If you earn less in the first part of the year than in the latter part you still need to make even instalments of tax, which means you are paying income tax on money you simply do not have.

And this situation is worse if you get a high paying, three month job in the latter part of the tax year so I always found it best to just stump up what the tax man requested.

Didn't know you could do that.

house/consultancy

I'm sure that you can always produce extreme cases but in 99.99% of the cases it is reasonable. In other cases maybe you should consider if that if you are disadvantaged in receiving income and disadvantaged in paying tax maybe you should address the income problem.

If the situation appeared so unfair it's always possible to ask.

Except that January is well past the actual end of the previous year and therefore if in the next year you are having problems you can the POA reduced.......

You have had the money so why not pay the tax?

He's talking about a POA payable by 31 January which is before the end of the tax year date of 5 April.

You need to read the whole thread as we've already done this bit.

The point is you might *not* have had the money and in those circumstances it is grossly unfair to have to cough up income tax.

Like I said - read the thread.

He's a well known troll who likes to insult and argue without bothering with the facts.

As I said before, not all self-employed people earn as if they are salaried and I know plenty who work like this.

People who raise their heads above the parapet often get them chopped off so I am not so sure that waving at them furiously, encouraging them to come and investigate my tax affairs, would have been a good idea.

And no, I do not have anything to hide, but years of experience has taught me not to invite trouble around the house if it is happy to go next door. :-)

We know that but you are saying it is unreasonable to pay 50% of tax

He is moaning about a good year followed by a lean. The POA is past his good year....so he should have the money. DOH

Then read what I wrote....reduce the POA

I have, I notice you have ignored the repeated answers given.

ROFLMAO! That is all you do Peter insult people. Nothing better to do like work.