What are the ‘Payments on Account’ I need to pay to HMRC?

Payments on Account is an area that I see regularly catching out new business owners.

You make some profit, some is tax free, the rest gets taxed at 20%, there’s something about National Insurance in there and that’s what I pay until next January. Right?

Maybe to begin with, but likely not for long.

When you first become self-employed, it’s quite likely that your first self-assessment tax bill will be relatively low, or you may even get a tax refund.

This usually happens because you paid a chunk of tax in your employment through PAYE and, now that you’re self-employed, you perhaps haven’t made a great deal of profit in year 1, if at all, so you may be able to claim back some of the tax you paid in your old job.

If you do have a small amount of tax to pay, if its under £1,000, then you will just make your payment by 31st January and then wait for the following year for the next one.

However, when your tax bill goes over £1,000, HMRC then ask you to begin making payments on account, in advance of next year’s tax bill. The amount they ask you to pay on account is 50% of this year’s tax bill, on top of what you have to pay for the year just gone. They then ask you to pay another 50% by 31st July, so by the time next January rolls around, you have already paid the same amount that you paid last year, on account.

Then, in the following January, you make a balancing payment, assuming your tax bill has gone up, plus 50% again, and it goes on and on. Very confusing!! Let me try to explain using an example. Excuse the dates being a year or too old.

Making Payments On Account

In the image above, the total tax owed for the tax year ended 5th April 2020 was £2,200. So, they paid that by 31st January 2021 but, as the amount was over £1,000 for the first time, they also had to make a payment on account, being another 50%. So, by 31st January 2021, they had to make a payment of £3,300 (£2,200 + £1,100).

They then had to make a further payment on account, being another £1,100 by 31st July 2021. So, by the time the next January rolled around, 31st January 2022, they had already paid £2,200 on account. So when they found out their tax bill for the year ended 5th April 2021 was £2,500, they only needed to pay £300, as they already paid £2,200 up front. However, they then needed to make a payment account, being 50% of the £2,500, in advance of next year.

From the image, you can see that after that first year, the amount payable each year then pretty much evens out. Its just that first year that catches people out.

Even for the super prepared; those that put 20% of their profit to one side each month. They can still get caught out by this extra 50%. So, make sure you don’t.

Ideally, you will have an accountant who will have already explained this to you and helped you plan for the tax liability throughout the year, by letting you know what profit you’re making each month, and what this will mean for tax, to include the payments on account.

Now that you are more prepared for these payments on account, you can begin to plan for them by using an accountant to prepare monthly management accounts that let you know what your profit is and what tax you should put to one side each month. If you would like regular management reports based on up-to-date information, please get in touch.

Just call on 01604 662670 or email [email protected]

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best.

New HMRC one-stop online shop provides taxpayers with tax relief information

HMRC has launched a new one-stop online shop designed to provide taxpayers with information on the tax reliefs and financial help available from HMRC.

In a new section of the GOV.UK website, HMRC has listed financial support available to ensure individuals are not missing out. There is guidance on relief for childcare and work-related expenses. There is also information about savings and getting help if you cannot pay your tax bill.

The shop is designed to make it easier than ever for taxpayers to claim the benefits, credits and allowances they are entitled to. HMRC has provided online guidance and tools to permit people to check if they are eligible for each relief.

Myrtle Lloyd, Director General for Customer Services at HMRC, said:

‘We understand these are very difficult times for many so it’s vitally important we continue to highlight the range of support available.

‘We’d encourage those who think they may be eligible for support to take a look and claim what they’re entitled to – it could make an important difference to household budgets at a time when it’s needed the most.’

More information can be found here GOV.UK

COVID-19 support grants paid to companies must be included on company tax returns

HMRC has warned that businesses must declare any coronavirus (COVID-19) support grants or payments on their company tax returns and stated that the grants and payments are taxable.

The deadline for filing company tax returns is 12 months after the end of the accounting period.

The deadline to pay corporation tax will depend on any taxable profits and when the end of the accounting period occurs. It is generally nine months after the end of the accounting period unless profits exceed £1.5 million.

Grants to be included as taxable income include:

  • Coronavirus Statutory Sick Pay Rebate.
  • Coronavirus Business Support Grants (also known as local authority grants or business rate grants).
  • Coronavirus Job Retention Scheme (CJRS) grant.
  • Eat Out to Help Out payment.

If a company received any of these payments, they will need to do both of the following on their CT600 tax return:

  • include it as income when calculating their taxable profits in line with the relevant accounting standards.
  • report it separately on their company tax return using the CJRS and Eat Out to Help Out boxes.

Myrtle Lloyd, HMRC’s Director General for Customer Services, said:

‘We want to make sure companies are getting their tax returns right, first time, including any COVID-19 support payment declarations. Support and guidance is available on GOV.UK.’

HMRC waives self assessment penalties for one month to ease COVID-19 pressures

HMRC is waiving late filing and late payment penalties for self assessment taxpayers for one month.

The measure will give those taxpayers affected by the coronavirus (COVID-19) extra time, if they need it, to complete their 2020/21 tax return and pay any tax due.

HMRC is still encouraging taxpayers to file and pay on time if they can. The tax authority also revealed of the 12.2 million taxpayers who need to submit their tax return by 31 January 2022, almost 6.5 million have already done so.

The deadline to file and pay remains 31 January 2022. The penalty waivers will mean that:

  • anyone who cannot file their return by the 31 January deadline will not receive a late filing penalty if they file online by 28 February; and
  • anyone who cannot pay their self assessment tax by the 31 January deadline will not receive a late payment penalty if they pay their tax in full, or set up a Time to Pay arrangement, by 1 April.

However, interest will be payable from 1 February.

Angela MacDonald, HMRC’s Deputy Chief Executive and Second Permanent Secretary, said: ‘We know the pressures individuals and businesses are again facing this year, due to the impacts of COVID-19. Our decision to waive penalties for one month for self assessment taxpayers will give them extra time to meet their obligations without worrying about receiving a penalty.’

A budget in all but name!

So, Boris Johnson has finally announced his plan for Social Care funding.

From April 2022 National Insurance contributions and dividend tax rates will increase by 1.25 percent, with the projected £12bn annual income to be ring fenced to pay for health and social care.

The increase will apply to employed (including deemed employees) and self-employed individuals and partners earning above the class 1 primary threshold / class 4 lower profits limit (currently £9,568 in 2021/22).

Employers will pay the additional 1.25% for employees earning above the class 1 secondary threshold (currently £8,840 in 2021/22).

All existing reliefs and allowances from employer’s secondary class 1 NIC will apply to the levy including the £4,000 employment allowance, reliefs for employers of apprentices, newly employed veterans and new employees in freeports.

From April 2023:

The increases will be legislated separately as a “health and social care levy” and NIC rates will return to 2021/22 levels. The levy will be hypothecated in law, meaning that the revenues will be ringfenced for health and social care. From that date, the legislation will also extend the revenue raising measure to individuals over state pension age in employment, who are currently exempt from paying NIC.

Alongside the levy,

which will be paid by employees, the self-employed and businesses, the government has announced a 1.25% increase in dividend tax rates from 1 April 2022, taking rates to: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The £2,000 dividend allowance will remain.


The Chancellor has also announced the date for the spending review to be published with the 21st October 2021 as the release date and a budget to follow on the 27th October 2021, so watch this space!!!

I hope you have found this useful, however please get in touch if you have any questions!

Your first year in business – how does tax work?

In my experience of working with people who have just set up their own business, something that causes a lot of unnecessary stress and sleepless nights is tax.

  • How is it calculated?
  • How much will I need to pay?
  • When do I need to pay it?

The truth is that you probably didn’t start your new business to worry about tax!

You likely did it because you are good at what you do and felt you could get paid more if you set up on your own. So, you put your tax on the back burner. Then, in January, you need to do something! If you speak to an accountant at this point, they may tell you that you need to pay thousands of pounds over to HMRC by the end of the month. Sorry, what…?

Well, let me explain how it all works, to hopefully help you prepare!

When you are employed, your employer deals with the tax each month by deducting it from your pay and they then pay it over to HMRC, usually each month. This is called PAYE (Pay as you earn) So, you are paying tax, but you don’t have to do anything yourself, your employer deals with it on your behalf.

When you are self-employed:

You pay tax on your trading profits. This is made up of your taxable income, less your business expenses.

Normally, you would take your trading profits for the period from 6th April to 5th April the following year. The start date might be different if you set your business up part way through the year – that’s fine. There are other circumstances where you might have a different accounting year but let’s keep it simple for this purpose.

Once you have your profit, it is this figure that goes onto your Self-Assessment Tax Return. Sometimes, tax adjustments might be required, if you have business expenses that are not tax deductible, such as entertaining customers, but again, let’s keep it simple and keep these out for now.

The tax you then need to pay is based on how much taxable profit you make.

Each individual has a personal allowance. This is currently £12,500 for 2021/22. Which means you can have annual income of up to this amount before you start paying tax. You then pay tax at 20% on income from £12,500 to £50,000 and then 40% on income over this (up to £150,000 – speak to me if you’re a sole trader expecting profits of over £50,000!!!)

Working example of tax calculation

Any tax payable will be due for payment by 31st January

So, it is always a good idea to understand what this figure might be as soon as you can, so that you can better plan for it.

You need to be aware that, the first time your tax bill exceeds £1,000, you will also be required to make a ‘payment on account’ (in advance of next tax year) and HMRC estimates this as being 50% of the tax for this year.

You would also then be required to make a second payment on account by the following 31st July, again, in advance of next tax year.

Small business Tax

Also, take into consideration

That in your first year of business, some or all of your personal allowance may have been taken up by your employment income. Or you may have overpaid tax on your employment income so might be entitled to have some of that refunded.

I need to mention National Insurance too, but ill leave it there with just a mention and talk about it in another blog.

There’s so much to take into consideration, no wonder people try to ignore it. I want to ignore it after writing all that!

What I suggest is to talk to an accountant early.

Make sure you’re talking to one who is proactive. You want someone to help you understand how the profit you made last month translates into tax so they can advise how much to put to one side to save for the tax bill, so you don’t get caught out the day before it is due to be paid!

If you have any questions on the above, or would like help with planning for your future tax bills, please get in touch.

Just call on 01604 662670 or email [email protected]

Martin Crooke is a Partner at Kilby Fox, we are friendly Chartered Accountants based in Northampton, sorting out the accounts for businesses in the Northamptonshire area and further. Martin has over 15 years’ experience working as an accountant for small businesses.

Making sure gifts to employees are tax-free

Some employers may wish to give a small gift to their employees, good on them! As long as the employer meets the relevant conditions, your employee won’t incur tax.

A tax exemption is available which should help employers ensure that the benefits provided are exempt and do not result in a reportable employee ‘benefit in kind’.

In order for the benefit to be exempt it must satisfy the following conditions:

  • the cost of providing the benefit does not exceed £50 per employee (or on average when gifts are made to multiple employees)
  • the benefit is not cash or a cash voucher
  • the employee is not entitled to the benefit as part of a contractual arrangement (including salary sacrifice)
  • the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties
  • where the employer is a ‘close’ company and the benefit is provided to an individual who is a director, an office holder or a member of their household or their family, then the exemption is capped at a total cost of £300 in a tax year.

If any of these conditions are not met then the benefit will be taxed in the normal way subject to any other exemptions or allowable deductions, so check before you gift!

No more than £50 

One of the main conditions is that the cost of the benefit does not exceed £50. If the cost is above £50 the full amount is taxable, not just the excess over £50!

The cost of providing the benefit to each employee, and not the overall cost to the employer determines whether the benefit can be treated as a trivial benefit. HMRC examples consider various gifts including turkeys, bottles of wine and gift vouchers, you can check out the list for gift ideas!

We absolutely want you to be kind to your employees, so give gifts willingly! But do make sure they won’t be stung on their tax bill after. Get in touch to discuss before you buy.

Can I claim [insert random cost here] through my business to save tax?

Each year, accountants get asked all kinds of questions about what expenses can get put through their business. This year was no different for Kilby Fox!

I thought it would be useful to give some examples of the kind of questions I’ve been asked, and their answers. In the hope that it helps other business owners to gain an understanding of the type of thing they can, and can’t, put through their business.

Can I claim the cost of my wife’s Master’s Degree?

In most cases, no. Put simply, the cost of keeping your current skills updated is tax-deductible, however, the costs of training to acquire new skills are not tax-deductible.

In most cases, obtaining a Master’s Degree would come under the ‘acquisition of new skills’ rule and so you wouldn’t be able to get tax relief.

This is all assuming the Master’s degree is not actually “wholly and exclusively” for the purposes of the trade; a phrase that HMRC likes to use.

If the skill being learned/updated isn’t relevant to the business, it won’t be tax-deductible.

As an example:

My client was an IT consultant and their wife’s Masters Degree was in dentistry. I mean there’s pushing it, and then there’s this…

Can I claim my personal car insurance as a business cost, as I use my car for business?

Fair question.

You use your car for business so why can’t you put through at least a percentage of your car insurance? The answer is that you probably already are claiming this, although you perhaps don’t realise it:

If you are charging your business for business mileage traveled in your personal car, then the 45p/25p allowance set by HMRC is designed to cover, in addition to fuel, the wear, tear, and other costs of running your car. The ‘other running costs’ bit includes the insurance costs, as well as MOTs, etc.

Can I claim the costs of lunch, coffees, etc?

Again, another good question.

It’s perhaps not as straightforward as you would like though. HMRC says “everyone must eat in order to live and such costs are normal costs of living incurred by all and not incurred for the purpose of trading”.

So, because you need to eat and drink to stay alive, it cannot be “wholly and exclusively” for the business, therefore, not tax-deductible.

There are some instances where it can be claimed, however. These are:

  • If you’re staying away overnight for business. In this instance, you can claim ‘reasonable’ costs for the evening meal and breakfast.
  • If you make a journey that is outside your normal pattern of business activity. So let’s say you work from home but needed to travel several hours to attend a course, the cost of your lunch would an allowable expense.
  • Or, if your business, by its nature, has lots of temporary workplaces. Like a party entertainer, everyone loves clowns right? 🤡

If you have any questions about what expenses you can put through your business, please get in touch!

Just call on 01604 662670 or email [email protected]

Me: Do you know when you’ll break even?

Everyone: Who’s ‘Even’?

An important question for any new business owner, but what does it mean?

Put simply, the ‘Break-even point’ is the point where your income equals your costs. At this point, your business is no longer loss-making. Hoorah!!!

But why is it important to know what the break-even point is? Why should I care?

Again, in simple terms, understanding where your break even point is, will help you to reach profitability more quickly. Let me try to explain…

You’ve just set up your business, selling the old classic – ‘widgets’ (does anyone know what a widget is? Is it even a real thing?)

You already know how much rent will be, what the business rates are, you have a good idea of utilities, insurance, miscellaneous bits and bobs and the all-important accountancy fee. These are your fixed costs, or ‘overheads’. They should stay pretty much the same month on month, regardless of how many widgets you sell.

You also know the costs involved in making your mighty widget. You know how much it costs to buy the materials for one widget and how much labour costs go into building that widget. These are your variable or direct costs. This is because they vary depending on how many you sell. If you sell more, your variable costs will increase.

For this example, let’s say your fixed costs are £1,000 per month and each widget will cost £50 to make.

Your research leads you to believe that you will sell 50 widgets a month. You now have all the information to work out your break-even point. Your fixed costs are going to be £1,000 per month and your variable costs will be £2,500 (£50 x 50). Total costs are £3,500 which means, in order to break even, you will need to sell the 50 widgets for £70 each. If you sell 50 widgets at £70, you will cover all of your costs, but won’t make any profit.

A diagram of the calculation in the text

But now you are armed with some really important information. You now know that if you can sell the widgets for any more than £70, you will be in profit. From here, you can review your sales price and anticipate how much profit you will make each month based on anticipated sales.

But I don’t know how many I’ll sell!!

Firstly, calm down!

Ok; you don’t know how many widgets you’ll sell, but you know that a competitive price is £100 per widget.

With this information, you know your gross profit, or ‘contribution’ (selling price – variable costs), from each sale, is £50 (£100 selling price – £50 cost to make).

A diagram of the calculation in the text

If you’re making £50 gross profit on each widget, we know that, in order to cover our fixed costs of £1,000 per month, we need to sell 20 widgets to break even.

Again, armed with this information, we can set monthly selling targets.

Too many business owners don’t monitor their costs, and so they set selling prices that don’t help them cover their costs. They end up being busy fools, working really hard and earning little or no money from it. Then someone comes along to explain all this and they get scared to put their prices up for fear of upsetting their current customers. It happens so often!

Understanding your break-even point early on will help you set more profitable selling prices and enable you to set goals to help you drive the business to profitability as quickly as possible.

Now that you know what ‘Break-even’ is and how important it is to understand this within your business, why don’t you get in touch to discuss further.

Just call on 01604 662670 or email [email protected]

If you have any further questions, or would like to book a free
one-hour consultation with one of our partners, please get in touch.
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