Self-Assessment...on account?

[kloofnek]

Why does one have to pay 6 months tax " on account" the first time one does does a self-assessment tax return....and is this just the one time.????

[1eyedjack]

There are three due dates for payment of self assessment tax for any tax year: 31 January within the year, the following 31 July, and the following 31 January.

There are some complications
(a) where you can in some circumstances elect for tax to be collected by PAYE coding restrictions,
(b) where your liability fluctuates from year to year either side of £1000, and
(c) where you have a PAYE income source and a high proportion of your income is taxed at source.

However, disregarding the complicated cases for the time being, the basic rule is that on the third instalment (31 Jan following the tax year) you pay any Capital Gains Tax, together with the excess of your income tax (+ class 4 NIC) over the total self assessment liability for the previous year. Any tax that is not payable on that third instalment is payable in equal instalments on the earlier two dates.

If you have been in self assessment for several years and your income is stable from one year to the next, so that your total liability for the year does not fluctuate much, then the vast majority of your liability will be concentrated into the first two (equal) instalments with just a minor correction on the third instalment (which coincides with the first instalment for the following year).

However, in the first year of self assessment, there will have been no self assessment liability for the previous year, and therefore the entire liability for that year is payable on the third instalment, which coincides with the first instalment for the next year's tax, and this "double whammy" can result in your paying effectively 1.5 years' tax in one instalment.

This double whammy effect can repeat in years where your tax liability goes up dramatically from the previous year, even when you have been in self assessment for previous years.

By its nature, the system asks for the first instalment before HMRC c

[1eyedjack]

Previous message truncated - presumably there is a limit on characters per post. Would be nice to have some warning. Anyway, just to finish the sentence that was so rudely curtailed ...

By its nature, the system asks for the first instalment before HMRC can possibly know the total liability for the year, on which the instalments are calculated. To get around this it is assumed initially that your total liability for the year will be at least as much as that for the previous year, when calculating the first and second instalments. If you know or suspect that this will result in an overpayment then you can elect to have the instalments reduced to such an amount as you estimate will be the true liability. If you overcook that application there will be interest implications.

[kloofnek]

Sorry about late response to your fully informative reply for which I thank you,have been away for a few days.
So can I now assume that the "18 months" I had to pay on the onset of submitting self-assessment is only the one time???

I am retired but work part-time and P.A.Y.E on this and my occupational pension.I also receive my UK pension albeit a small one.
The income I am having to declare is a foreign pensions which are not taxed in the
countries of origin.I can safely say it will be of a stable amount every year so tax payable will be pretty stable.

[1eyedjack]

If your self assessment liability ever drops below £1000 in total for a year (call it year X), then you will not be asked make payments on account of year X+1, and any liability for year X+1 will be payable in a single payment on 31 January following the end of year X+1. If your total liability for year X+1 rises above £1000 then you will potentially be required to make payments on account of year X+2, the first of which coincides with the due date for paying the tax for year X+1. Therefore, if your SA liability for each year hovers at around £1000, some years dipping below but others going above, then the 18 months' tax effect in a single instalment could theoretically repeat. A similar effect is observed if in year X the total amount of tax deducted at source (under PAYE or from investment income) is more than 80% of your total liability for the year (self assessment plus tax taken at source).

However, if your total SA liability for each year remains fairly stable AND consistently above £1000 per year, then you are correct in your assumption that after the first year you should find yourself paying roughly half a year's tax on each instalment of 31 January and 31 July.

The position is potentially complicated by the fact that you also have PAYE income sources. There are options, within certain financial limits, to have your PAYE code restricted so as to collect tax that would otherwise be due under self assessment on other, untaxed, income sources. This tends to smooth out lump sum liabilities, but depending on the numbers can either accelerate or defer the payment of tax.

http://www.hmrc.gov.u...erstand-statement.htm

[1eyedjack]

By the way, although it was not part of your question, when advising clients who have foreign pensions I always check whether they qualify for, and are aware of, the available 10% deduction from certain foreign pensions. It's availability depends on the pension source. It is quite rare, but also (perhaps for that reason) often overlooked.

http://www.hmrc.gov.u...eimanual/EIM74201.htm
and

http://www.hmrc.gov.u...eimanual/EIM74006.htm

[kloofnek]

Yes,1eyedjack,we are aware of the 10% reduction on foreign pensions,but thank you for pointing it out.
This will be our second year of doing SA and wanted to be sure than nothing is paid "on account" this time.
Thank you ...again...for being so helpful and taking time to answer my question so fully.
Have a nice weekend.