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Payment on Account HMRC

Discussion in 'General Chat Forum' started by Paul_HDLover, Jan 2, 2012.

  1. Paul_HDLover

    Paul_HDLover Member

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    Hi everyone - and happy new year. :smashin:Shame on me for posting a thread about tax and self assessment on 1 January :devil:

    I'm a Self Employed IT Contractor and this year my accountant has hit me with a major financial blow, in the form of an HMRC 'payment on account'.

    Essentially, this month, I am due to pay the personal tax from year 10-11, which includes tax due on 2nd property rental and also dividends from my company.

    Now the above is a reasonable amount of cash, which due to its 'personal' nature is due from my own 'personal' bank account. I had made the necessary provision for this sum.

    Now the accountant is telling me that I must pay for the current year personal tax dues before they have actually arrived in my pocket. They are saying that the personal tax 'projected' for the year ahead needs to be paid in 2 installments. The first in January (Along with the tax I know I have to pay) and the second instalment in July.

    To put this in perspective with a made up example:

    Rental profits made for year 10/11 - £2000
    Dividend paid - £30000

    Assume (for arguments sake) all of the above is taxed at 22%, makes the amount payable to HMRC in January 2012 £7040.

    What I am also being asked to pay this month is 50% of the project amount of personal tax that will be due for tax year 11/12, so using the above example, an extra £3520 in January and an extra £3520 in July.

    Reading the HMRC website:....

    SALF303 - Payment of tax: payments on account

    ...I understand that HMRC are taxing in this manner because they deem the money as 'made' by the individual, but in my circumstance, the dividend for 11-12 has not yet been paid, therefore the money is not in my pocket to pay.

    HMRC will reduce payment on account only if the projected amount is adjusted as a result of the projection being lower than the previous year, but again that doesn't fit my scenario.

    I am being asked to pay tax on money out of my own personal account that I haven't actually earned yet. :eek:

    Seems unreasonable to me. I think the accountant has screwed up because I have never had to pay in this manner before. This is affecting other people for the first time this year also (Who I work with) and it is making what is already a difficult month, basically impossible.

    Any other members incur this type of tax or any words of guidance from any Financial types?

    What a miserable start to the year. The only way is up...:facepalm::suicide:
  2. Ian J

    Ian J New Member

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    If the dividend that you receive is from a company that you control can't you pay a proportion of the dividend in January to allow you to pay the tax.

    This is what everyone else (including myself) does who is in a similar self employed position
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  3. imightbewrong

    imightbewrong Active Member

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    Yep - just pay the dividend - what are you waiting for? :) You are 3/4 of the way through the 11/12 tax year - is it not reasonable to pay 2/4 of the tax?

    Are you self-employed then, rather than running a ltd company? Is that something you have taken advice on?
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  4. Greg Hook

    Greg Hook Moderator & Reviewer

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    I've done several tax returns for clients and payments on account have been the norm for years. Most prefer it as it saves getting a huge bill once a year. Especially those that seem to have an inability to put aside the money to pay it!

    In your case just pay yourself whatever portion of the dividend you need to cover the monies due to HMRC.
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  5. niceguy235uk

    niceguy235uk Member

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    You will always get a huge tax bill once a year, depending of course of in the income.

    For as long as i can remember payments on account have always been around.

    I think one of the reasons is that if you go tits up, they have had their money.

    You could always set up a time to pay agreement with them, if they will let you.
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  6. Desmo

    Desmo Well-Known Member

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    Payments on account have been around for as long as I can remember. I believe your accountant could write it down to £0 but you'll have to play catch up at some point.
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  7. Stu V

    Stu V Active Member

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    I've had to pay this way since I became self employed 8 years ago. 50% on account on 31st January and & balance on 31st July. This seems to be fairly new as my parents were self employed from 1979 - 1996 and never paid anything on account. It's something you will have to pay unfortunately.

    If you became Ltd company then you wouldn't have to pay any upfront
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  8. imightbewrong

    imightbewrong Active Member

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    Do the self-employed have dividends? I thought this was something only paid by ltd companies.
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  9. Stu V

    Stu V Active Member

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    Didn't register that bit, only saw self employed part :blush:

    I guess the IT Contracting business is a Ltd company and the rental properties is not?

    I set up as ltd company this year and do not have to pay any on account in January
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  10. imightbewrong

    imightbewrong Active Member

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    Yep - I think the op needs to clarify here. Dividends should not enter into any payment-on-account calculation - since they are not 'guaranteed or expected' income - they are paid at the discretion of the company.
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  11. Ian J

    Ian J New Member

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    Not true. The Limited Company only has to pay Corporation Tax on profits made but any director would get caught in the trap if he received his income in the form of dividends
  12. Ian J

    Ian J New Member

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    I believe that dividend income is assumed to be at the same level as the current year and the paymant in advance calculated accordingly but you can ask HMRC for special dispensation if you feel that the current year's dividend is likely to be substantially smaller
  13. andyk

    andyk Member

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    But the tax on dividends is likely to be pretty low (certainly at the levels quoted by the OP) as company tax has already been paid and dividend tax credits apply.
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  14. Stu V

    Stu V Active Member

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    True to a point. If you do it correctly though and don't earn too much then you won't pay any personal tax.

    You income must be far too high :p
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  15. mason

    mason Member

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    The tax on dividends is paid for by the company at a rate of 21%.... And no personal tax would be payable by yourself- unless between your salary and dividends being received throws you into the higher rate personal tax (the 40% bracket)... Then you would pay the 40 % tax on the income over and above and into the higher rate tax amount. Your salary will be paid by the company I.e. paye and the dividends are taxed via corp tax.

    With the above in mind- if you are due tax being in the higher rate then you will be due to pay a payment on account.

    Of course- your rental profit will be be simply added to your income for the year and you will be taxed accordingly.

    It's a difficult thing to explain like I have tried to above and many folk may misinterpret what I have said- but feel to ask any questions etc.

    Like Ian J says above- why not defer some of the dividends and try and avoid (if applicable) the higher rate tax etc

    However- if I were you I would look at changing accountants- they obviously haven't met with you throughout your financial year and advised you on your tax planning etc
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  16. Paul_HDLover

    Paul_HDLover Member

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    Thanks for all your input folks - and apologies again for bringing up an HMRC nasty.

    To clarify a couple of questions raised - Yes it is a Ltd Company and I am the Director. I am also an employee of the Ltd company and provide IT services to whoever wants it. As a Director I pay Corporation tax on any profits generated within the tax year, I also pay a salary to myself (as an employee) and pay employee and employer PAYE & NI at source. With any amounts remaining I pay myself a Director Dividend. I complete a Self Assessment return each year where I declare all profits from dividends, additional properties & stocks & Shares etc. At the end of this month I am due to pay personal tax resulting from 10-11 self assessment, but I am also being asked to make a payment on account based on the 10-11 figure (50%) at the same time. My issue is, I don't really have the cash to cover that (As it needs to come from my personal bank account) - it wasn't part of my budgeting. I have been self employed for 4 years and had never heard of POA before. I have queried this with my Accountant 3 times and have never received an answer other than the fact I have to pay it now.

    I can see the benefit of a POA as it means that instead of being hit with a single large payment in January, the payment is made in 2 lumps - Jan & July. My problem is that I have not actually received a dividend payment this year yet and it is unlikely I will receive a dividend until closer to April but I am being asked to pay 50% of the amount I am about to pay for 10-11 tax year at the same time.

    I'd love to pay myself an additional dividend to cover the amount I need, but austerity measures mean that my company is not as flush as one would like atm and that is not expected to change until late March / April.

    Although I said I can see benefit of POA, I also think it is a bit of a scam....for something like property income OK you could argue that the personal income is regular therefore POA is valid i.e. why should I earn interest instead of HMRC while the money sits in my bank account for a year, but given that >90% of my personal tax liability comes from dividends I don't see why I should have to suffer it. It is absolutely my right to declare a dividend on 5 April each year, HMRC should not dictate to me when I make a dividend payment. I might be wrong :).

    Thanks again for the comments folks. I dont really know what I wanted to get out of the thread, but from reading your comments I think POA is standard and the fact it has come as a surprise to me is perhaps an issue I should take up with my Accountant.
  17. Greg Hook

    Greg Hook Moderator & Reviewer

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    Ok so you aren't self employed as you mentioned in your first post?

    Also, HMRC aren't dictating to you when you make a dividend payment. You can make it whenever you choose. What they are dictating is that every January and July you are required to make payments on account for that current year.

    Tax is a minefield, which is why a decent accountant is worth whatever they charge. It's said that whatever you pay an accountant they will save you at least that and more during the year.

    Once you can get into the swing of things payments on account you will find much easier to operate, it's presumably just this first year that you are on them that it is causing an issue. Speak to HMRC and explain your situation and they will sort a payment plan or other arrangements.
  18. Jenn

    Jenn Active Member

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    SALF303 - Payment of tax: payments on account

    Providing that your financial year runs April to March, then you are well passed the half way point in the financial year and unless you make most of your money in the last 3 months or you have no cash flow, the company should have at least half of the dividend money in the bank, right?

    If however you've had a "bad" year so far and you don't expect to receive anywhere near the amount of dividends and therefore total income, I believe you can appeal to HMRC to reduce or cancel the POA.
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  19. Paul_HDLover

    Paul_HDLover Member

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    Not sure how you get that? Perhaps it was because I said I was employed by my own company?

    Even self employed people need to generate a salary - there is no point otherwise. I agree, there are some quirks in the IT Consultancy business but broadly speaking I have a company, which I own and work for, how is that any different from a painter & decorator or a shop keeper?

    So this is January 2012. I am due a payment on account for the current tax year 11-12 based on a projection of what went through the books for last year (Which lets say was a lot). But this year, my company hasn't earned anything yet so no dividends have been paid, so no money is available to make the payment on account and even if it was available would need to be refunded to me by HMRC next January because the actual figure in the return will be significantly lower than the previous projection. Perhaps HMRC should make a payment on account to me on the basis that I have had to give them money that I haven't and won't earn out of my own bank account, which they will in turn earn interest upon before agreeing with me in 12 months time and sending it back. :devil:

    Your right, its a minefield. I know I need to pay it, its just the manner in which this has come about and what it does to my cash flow that I have issues with. I'll be directing that back in the direction of my Accountant. :lesson:
  20. Paul_HDLover

    Paul_HDLover Member

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    Hi Jenn, I think that could be assumed to be the case for a majority, but in my particular scenario most of the Company invoices will be cleared in Q4.

    You are right though, a call to HMRC should help sort this out. I can see that you can amend the projections and such like so perhaps there is flexibility there to cope with individual circumstances - at least that is my hope.
  21. imightbewrong

    imightbewrong Active Member

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    IMO you should NOT be required to make a payment on account. You do PAYE as part of your LTD, so there should be nothing to pay.

    On the second line in your OP you said "I'm a Self Employed IT Contractor" - however this is not the case in HMRC terms - you are an employee of a ltd company you also happen to be a director of and also happen to be a shareholder of.

    I have a similar set-up and have been running for a few years - no one has ever suggested a POA should be needed - and rightly so. If you were 'self employed', then yes a POA would be required, because you would not be PAYE.
  22. imightbewrong

    imightbewrong Active Member

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    a few corrections

    do you have a pension run through the ltd? that would probably be good.
  23. imightbewrong

    imightbewrong Active Member

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    Edit> if the POA is in relation to the dividends, and there haven't been any, then just ring up HMRC and say so. the point of the POA is to give them some money as you go along (as mentioned, you pay 50% of the tax 75% of the way through the tax year). You are not expected to pay tax on money you haven't earned.
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  24. Paul_HDLover

    Paul_HDLover Member

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    Thats interesting, I might be wrong.

    You make a good point about the fact that my PAYE is paid directly from the ltd to HMRC on 3 monthly intervals therefore why are they calling on a POA.

    No pension through the Ltd - although I am considering it to reduce Corp liability if its possible I dont know.

    I think that I am being asked to do a POA because my normal dividend take would exceed whatever the dividend allowance is i.e. becomes subject to tax over a certain bracket, together with some minor profits I make from property rentals.

    Reading through some of the blurb online, a POA is not required if the personal tax liability is within a certain bracket:

    Perhaps this is where you and I differ. I seem to fall into the category that does need to pay it, but why for the first time I have no idea. :suicide:
    Last edited: Jan 2, 2012
  25. Ian J

    Ian J New Member

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    I must admit that I don't understand the ins and outs of self assessment but I pay an accountant who does. If you don't know why you have to pay a POA this year for the first time that's one thing but if you don't get a satisfactory answer from your accountant then it's time to change accountants
  26. Desmo

    Desmo Well-Known Member

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    It is correct, you are not self employed but are employed by a limited company that exists in its own right. It may seem like a technicality but there are legalities behind this. If you fill out any forms that ask about your employment status you shouldn't be saying self employed :)
  27. imightbewrong

    imightbewrong Active Member

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    It seems like you are starting now because you have gone through a trigger level where 'not enough' of your tax is collected at source (i.e. PAYE or the dividend tax credit). I suspect I avoid this as both myself and SWMBO receives a dividend, so we can max out both our allowances without incurring any additional tax. The surplus remains with the company.

    If I was going solo (i.e. no accountant) I would be telling HMRC this:

    The payment on account was calculated based on a tax year with revenue £x. At this point in the last tax year the revenue was £y, however it is actually much less than that in this tax year - £z << £y. Therfore the payment on account should be reduced by the £z/£y ratio.

    I have an accountant, but I don't normally bother getting them to to the SA as it is always very straight forward, and generally they owe me tax, so I don't want to jinx it :)
  28. Greg Hook

    Greg Hook Moderator & Reviewer

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    AS imightbewrong said, you can't be an employee of a company and a Director and be classed as self employed in HMRC terms. Even if you are the only employee of that company.
  29. mason

    mason Member

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    You are still classed as self employed and require a self assessment tax return because you are also a shareholder. You therefore have to state all your earnings inc. salary and dividends.

    If both of these income streams put you into the 40% tax bracket then you would be liable to pay tax as well as the corp tax that the company has paid on its profits.
  30. Ultima

    Ultima Active Member

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    If you are a shareholder you are not classed as self employed, it has nothing to do with your employment status at all. Directors are not self employed, they may be employed under a contract of employment or be an office holder.

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