Taxes Online Help

Get an accountant - A good one will save you much more than they cost.

Chrismear is absolutely right about the complex system of payment "on account" - i.e. paying a chunk of estimated tax for the subsequent financial year in the current one.

I've recently stopped being self employed, but HMRC still want a not insubstantial amount of money from me on account. Just before the end of the last tax year, I had to hand over £800, despite now being employed full-time and paying tax via PAYE. Ridiculously, about a fortnight after I paid, they sent me a statement saying I'd overpaid by almost the same amount. So I claimed a rebate, and they sent me a cheque. Of course, when the next payment on account period comes round, they'll probably ask me for more again.

It's incredibly frustrating, and it's little wonder that so many small businesses either go belly-up in their first couple of years, or opt to work in the black economy.

By 'clever way', I basically mean making an appeal that says, "hey, I'm actually not making as much in 2008/2009 as you think I am", which, if successful, will reduce your "payments on account" for the 2008/2009 tax year which you're making during 2009. But that's just the 2008/2009 tax. As far as I know, there is no way around the fact that your large tax bill for your huge income in 2007/2008 will simply have to be paid in two large instalments in 2009.

taxes were based on your previous years income until you submited your return

When they say this, they're talking about the next tax year, 2008/2009. (And subsequent years after that.)

For your first year in business, they've got nothing to go on, so you literally don't pay anything until 2009. Then, you'll pay half of the tax in January, and the other half in July.

Unfortunately, you'll actually be paying a bit more than that, since the two payments you make during the calendar year 2009 will not only cover the income tax you've already assessed from the tax year 2007/2008; they will also include a proportion of the estimated tax for the tax year 2008/2009. This is the "based on your previous year's income until you've submitted your return" bit.

In late 2009, you'll complete your assessment for the tax year 2008/2009, and find out the true income tax you're liable for in 2008/2009. You should find that you get a repayment in January 2010, because they'll have overestimated your tax for 2008/2009, since you had such a unusually good year in 2007/2008.

It's mad, isn't it?

There may be a clever way to get around the "pay-lots-and-then-get-a-repayment" situation, but you'll have to talk to an accountant to find out.

Again, I must emphasise I don't have firsthand experience with this method of collecting taxes (which is peculiar to the self-employed), but I did read up on it when I was setting up my business.

Although I am not in the UK, I think that Chrismear has a natural gift for explaining these financial things in understandable terms.

Oh, I know you're not trying to get out of paying the tax. I'm just saying that it might not be possible to spread it out as you'd like.

As far as I understand it, you only pay your income tax after you've submitted that first self-assessment tax return. So over the course of 2009, you'll just get three bills that cover the income tax from the 2007/2008 tax year. Until then, you won't be paying any income tax at all. So it's your responsibility to sit on that money until the tax becomes payable.

I'm not trying to get out of paying the tax on it but I thought I read that taxes were based on your previous years income until you submited your return or something - a bit like how when you're PAYE they assume the income you make in 1 month is the same every month, so if you have a good month you pay loads of tax then have it rebated the next month when your wage goes back to normal. Once I've got the money and paid the tax on it I want to spend it not sit on it to pay off the next tax bill and then wait for a rebate.

I may potentially have a large job coming in paying about 5x what I would normally make for the whole year - I know theres going to be a huge tax bill on that this year but my question is - do I need to save most of it to pay my tax bill for the next year then wait for a rebate a year later or will the fact I've only been in business a few months mean I wont get an estimated bill for a couple of years?

I might be completely out of the loop on this, but I don't think there is any 'estimated tax bill'. At the end of this tax year (2007/2008), you will simply fill in a self-assessment tax return, where you will have to state the profit that your business made in that year. You are then liable for income tax on that profit. So, if you make a huge amount of money this year, then you're liable for tax on it.

As I understand it, there's no way to 'offset' this year's profit against future low income or losses. (The only thing you can do is set past years' losses against this year's profit.)

However, in pure practical terms you might not actually have to pay this tax for a while. The current tax year ends in April 2008; the deadline for submitting your tax return for that year is something like December 2008 or January 2009, and then you make your payments after that.

Like I say, I might be wrong on this one, because my first-hand experience is with corporation taxes and doing self-assessment as an employee, not with doing self-assessment as a self-employed person. But, if you're not planning on getting an accountant's advice, it would probably be safer to assume that all of the tax on this year's extra-large income will turn up in this tax year, and to put aside the appropriate amount accordingly. As Abiezer says, though, it's probably worth talking to someone who's familiar with this.

I can't speak to your specific tax questions, but some years ago I filed taxes in the UK as a self-employed translator.
I ended up using an accountant for a one-off consultation every year where she set me in order for the few different largeish jobs I'd do in the year. She was also able to spread the earnings out over different tax years and get deductions for costs like this.
In the end I saved more than her fee every time I used her, and even ended up with a rebate on PAYE tax paid the year I went slef-employed. I would strongly suggest asking friends for recommendations of a good accountant if you don't have one already.

Sorry, 50% in the first year for small businesses. This stuff is complicated!