An unpleasant surprise often awaits people doing their self-assessment tax return for the first time – and a recent study shows many end up in debt as a result.
The self-assessment deadline of January 31 is now past of course, but analysis by Royal London has shown that up to two million people could resort to using overdrafts after being hit with an unwelcome ‘payment on account’ demand from HM Revenue & Customs (HMRC).
To ensure it collects at least some of the tax you owe in a current tax year, HMRC will request your tax and National Insurance payment from the tax return you had just submitted with your self-assessment, PLUS half of the estimated tax liability you would pay the next year, with the other half payable by July 31.
For a self-employed and first time self-assessor, this can come as a shock if they have not sought advice from their professional adviser beforehand, or indeed had not properly noted the advice when it was given.
This ‘year in hand’ approach to income tax may mostly apply to the self-employed but can easily apply to employed people too, as they will still be taxed on additional sources of income such as interest, dividends, rental income, pensions and investments – and be required to submit a self-assessment.
As a result the research by Royal London that surveyed 4,000 UK adults found that many people find themselves with tax bills they couldn’t afford or hadn’t budgeted for.
It revealed that more than a third (37%) of the 1.8 million people who will turn to overdrafts said they are shocked by the size of the bills they face with payments on account adding to the pain.
Of those surveyed, only half of those who are employed had set aside savings to pay their tax bill, compared to 69% of self-employed respondents.
It also found that one in five (18%) of those who are employed said they expected to use overdrafts, while 9% of those who are self-employed said they would need to.
Income tax receipts are expected to soar by around £35billion by 2028-29 as a result of fiscal drag, the scenario where rising incomes and frozen tax thresholds push greater numbers of workers into higher tax bands.
It is though now possible to set up a weekly or monthly direct debit to make payments on account through the year, but you will not receive interest on this. If you over pay you will receive a refund, but if you underpay you will be charged interest.
If the sums involved are significant, it is worth considering whether to pay your monthly amounts into an account that will pay you interest and you can pay HMRC from that at the end of the tax year.
However you choose to pay, it is vital you budget for the payments on account and give yourself (and your adviser!) plenty of time to prepare and submit your tax return.
