As one of our most popular articles we have updated this for 2017.
The 31 January tax deadline isn’t just a rush to get your Self Assessment form in on time. It is also an annual scramble to get together the cash to pay your bill.
Self-employed people often find themselves with a bill that they cannot pay. If, after having completed your Self Assessment, you find that you are unable to pay your tax bill, it is important that you take action immediately.
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First, use your reliefs
All too often, self-employed people do not take advantage of the reliefs and allowances to which they are entitled. This means that they end up with an inflated tax bill – and, consequently, that they are more likely to find it difficult to pay.
You are entitled to a range of allowances and reliefs. Perhaps the most important of these is your personal allowance. Every taxpayer gets a personal allowance (although it is gradually reduced for high earners); this means that the first chunk of your income is tax free. For the 2014-15 tax year the personal allowance is set at £10,000.
You are also able to offset allowable businesses expenses against your income. Expenses are allowable if they have not specifically been disallowed by HM Revenue and Customs, and if you can prove that they were made solely and exclusively for business purposes. In cases where you derive some personal benefit from the expenditure (for example if you use one mobile phone for business and personal purposes), you need to be able to show exactly what proportion of the expense is business related in order for it to be allowable.
Payment on account
Many taxpayers fail to factor in the payment on account when budgeting for their tax bill. The payment on account is a way of making your January tax bill more bearable. The payment is split into two instalments, the first of which is due on 31 January. Each instalment is normally equal to 50 per cent of your tax bill for the preceding tax year. So, on 31 January you will be expected to pay your balancing payment for the previous year, plus 50 per cent of your total tax bill for that year. You will then make a second payment of the same amount on 31 July.
It is possible to have your payment on account reduced if you think that your taxable earnings will be lower in the following tax year. In order to do this you need to complete and return form SA303, which is available on the HMRC website. You must do this by 31 January.
There is an understandable temptation for self-employed people to artificially reduce their payment on account when faced with a tax bill that they will struggle to pay. There are a few reasons why this is a bad idea. To begin with, you should remember that all you are doing is postponing the pain of payment until the next January. It is often better to tackle the problem head on. Furthermore, if you reduce you payment on account and it then turns out that you earn more than you told HMRC you would, they will charge you interest on the outstanding sum. This can easily mount up over the course of the year, and further inflate next year’s bill.
If you simply cannot afford to pay your tax bill, you can approach HMRC with a payment proposal. This involves you suggesting an instalment plan to make the bill more manageable.
HMRC is legally obliged to properly consider any proposal you make. But you should remember that you will normally be expected to pay the sum in one instalment if you can, and the taxman may ask about savings or other assets you are holding.
If you do not stick to an agreed payment arrangement, HMRC will begin legal proceedings to recover the money anyway.
What happens if you don’t pay your Self Assessment tax bill?
Finally, it is vital that you do not ignore a tax bill. Doing so will only make the problem worse; interest and penalties will start to mount up and, eventually, HMRC will start legal action. If you cannot afford to pay your tax bill, contact the Self Assessment Payment Helpline immediately, on 0300 200 3822.
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