Tax is probably far from most contractors’ minds as the summer holidays get underway and many attempting to steal a few days away from their desks. After all, the self-assessment tax deadline is in January, right? And the new year feels like a long way away.
Well no, not quite. You should actually make a payment to HMRC before this month is up. Too many contractors forget that income tax is paid in two portions, bringing costly consequences for those who miss the deadline. However, meet your obligations, and ‘payments on account’ can save you money in the long-run.
Let’s look closer at the summer tax deadline, and explore why paying now could mean paying less when January arrives.
Paying on account: the basics
The January 31st deadline is a yardstick everyone knows about: it’s there for calculating your earnings, dividends and expenses, as well as submitting them to the taxman. In this payment, you settle any outstanding tax on your account, plus an upfront payment for the year ahead.
But you don’t pay it all at once. There is another deadline — July 31st — that demands a second payment for the current financial year. Miss the cut-off at the end of the month, and a 2.75% interest penalty will start to accrue on your account!
Both payments are based on what you earned last year, instead of the current state of your finances. That’s because HMRC can’t predict how your income is going to fluctuate; it’s assumed that you’re bringing in the same, every trading period, even though that’s probably not the case.
It’s okay though — that’s what rebates are for, if you’ve paid too much before self-assessment day. What’s more important is getting your head around how paying on account functions, and avoiding the common tax return pitfalls.
Monitoring your tax status
You can miss the July deadline, but it’ll add a steady interest rate to the amount you’ll pay in six months’ time. Tax return software — or a pro-active accountant — will keep you on top of what’s happening with your revenue and expenses, and ensure you don’t get caught out when the deadlines arrive.
As is hopefully clear by now, payments on account really are half the battle when it comes to understanding your tax return obligations. But the returns themselves can still trip contractors up. So before you congratulate yourself for being ready to make the first of two important tax deadlines, there are some other things to check.
Forgetting to record each gig’s income
It’s not uncommon for contractors to move from one placement to another on an almost monthly basis, so it’s important to remember that with every new contract comes a new set of tax rules and implications. This is why it’s so crucial to record every penny of income from every stint you do — regardless of whether its duration is a few months, a week or even less.
Going rogue with receipts
For a hefty chunk of its practitioners, contract and freelance work involves the accumulation of many, many receipts. You’ll need to make sure you keep all your receipts in order to monitor your spending and generate an accurate picture of your tax liabilities. Just one more thing Speedy can help you with.
Losing your sense of liability
As a self-employed professional with multiple clients over the course of the year, it can be difficult for a contractor to gauge their financial position. But failure to monitor your tax liabilities can spring a number of nasty surprises when July 31st and January 31st roll around, especially if you’ve not saved enough for your tax bill.
The above really are the three mistakes contractors commonly make with tax returns. A fourth though could definitely be thinking January is the only time to do your taxes, there’s another – and it’s now!