From: Yellow 
Newsgroups: uk.finance
Subject: Re: Self employed - tax man wants money in advance - is this right?
Date: Thu, 22 Nov 2007 00:11:47 -0000
Bytes: 4677

Martin [ng@barrier.ngngng.fsnet.co.uk] said:
> 
> "Yellow"  wrote in message
> news:MPG.21ae90cbc8e60a5598a532@nntp.dsl.pipex.com...
> > JaffaB [jaffa_brown@yahoo.co.uk] said:
> >> Background First:  I run a small computer software house/consultancy
> >> company.  As part of my salary, I sake most through salary (PAYE) and
> >> a 2% salary in dividends.
> >>
> >> Now the Issue: I had a meeting with my accountants today who was going
> >> through my accounts, and through my PAYE and tax.  They told me that I
> >> had to budget for a fairly sizable cheque in Jan next year, as 'the
> >> tax rules have changed and you now have to pay a portion of your tax
> >> in advance'.  Is this right?
> >>
> >> I am checking that in fact the rules have changed (and my accountants
> >> are not trying to cover up a goof on their part).  Are contractors/
> >> self employed now expected to pay some tax in bulk, in advance?
> >>
> >> If so, how the very-warm-place does this work?  How does the
> >> government know how much I am going to earn next year?  And they sit
> >> there, making whatever percent interest on my money?
> >>
> >> Is this right?
> >>
> >>
> >> Regards
> >>
> >> John
> >>
> >
> > 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.

It all depends on how regular your work, or more importantly your 
income, is.
 
> 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
> 10 months profit before paying tax on 6 months of it....!

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.

> 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.
> 
> 
>