The 31st of July 2024 is fast approaching for the second Payment of Account due for many self assessment clients, which is the second payment towards the 2023/24 tax return (due in full by the 31st of January 2025).

For those who are not familiar with what a ‘Payment on Account’ is, it’s best explained as a payment of tax in advance.

If you are completing self assessments each year when you are self employed or you have rental profits, and your tax bill is over £1,000, you will most likely have come across Payments on Account.

This is where you effectively prepay your next years tax bill, based on this years profit. For example, if you had a £1,100 tax bill for the 2022.23 tax year, you would have had to pay £1,100 + £550 in tax by the 31 January 2024 deadline.

The £550 is the first half of tax estimated for your 2023.24 tax bill and by the 31 July 2024, you will then pay another £550 payment of tax so by the 31st of July 2024, you would have paid the same amount of tax as your previous tax year.

If your actual 2023.24 tax bill is calculated at £1,100, there is no further tax to pay for this tax year however you will still need to pay £550 by the 31st of January 2025.  However if your profits have increased in the 2023.24 tax year, you will need to pay any shortfall of tax for that tax year + your next payment on account will be higher as well.

The same happens in reverse. If your tax bill for 2023.24 is lower, your Payments on Account payment is also reduced.

Entering the Payments on Account system for the first time often comes as quite the shock. Most businesses look at their bank account as a measure of success. However, you are taxed on your profit which is not the same as your business bank balance.

My top tips for keeping on top of your tax bills are:

• Invest in learning and using an accounting software system. We recommend Quickbooks Online for all of our clients, because it is easy to use and has a fantastic support team and we pass on the discount we get to our clients also.
• Remember that you are always paid by your sales without any tax deducted, unless you are a CIS subcontractor. You always have to save for this tax so that you don’t get caught off guard when it comes time to paying it.
• Always have a business current account and a business savings account that you use to save up for your tax bill. If your tax bill is lower then expected, then you can treat the extra money saved as a bonus for your hard work. Banks such as Starling and Monzo have business bank pots which means you can save for tax and not have to have multiple tax accounts.
• Set yourself a budget for how much money you take out of your business. Make sure that budget is adjusted if your business profits decrease in anyway.
• Get your tax return done early in the year. Remember you can submit your tax return anytime from the 6th of April 2024 so don’t leave it until January to realise you have a larger tax bill then you’d saved for as it’s a stressful time to find extra money after Christmas.

If you are looking for a supportive team of accountants to help you get in more control of your business finances, get in touch via our Contact Us page.