January is the cruellest month for the self-employed. No one has the money to pay you, and HMRC wants a large tax payment.
Tax and NIC due on your self-employed profits for 2017/18 is paid in two Payments on Account (POA), on 31 January 2018 and 31 July 2018. These amounts are based on the tax liability reported in your 2016/17 self-assessment tax return.
If your final tax liability for 2016/17 is more than the total of POA paid in January and July 2017, you pay the rest on 31 January 2018, plus any Capital Gains Tax you owe for the year. Thus, the amount due on 31 January 2018 is half your normal tax bill paid as a POA for 2017/18, plus your CGT, plus any balance due for 2016/17 – ouch!
If your tax liability for 2017/18 drops compared to 2016/17, you’ll get some of your tax back for 2017/18 when your 2017/18 return is submitted (due by 31 January 2019) – but you’ll be out of pocket in the meantime.
Instead of waiting until 2019, you can ask to reduce the next two POAs if you believe your total tax bill for 2017/18 will be less than for 2016/17. We can help you calculate whether your POA will be too large.
You can opt to pay regular monthly or weekly amounts towards your tax bill by setting up a Budget payment plan with HMRC. You decide how much to pay as a regular direct debit. If the total paid is not sufficient to cover the tax due by 31 January or 31 July, you need to make up the shortfall, but this may be far less painful than finding a large sum in one go.
Do you need to discuss reducing your payments on account for 2017/18?