For millions of self-employed people, 31 July is a landmark date. It’s the day by which they must make their second payment on account (an estimated semi-annual payment) for the tax year that ended on the previous 5 April.
This year, however, special rules apply, with the government offering an extension to reflect the fact that many self-employed people are struggling financially amid the Covid-19 pandemic.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The first is simply to put off paying. This year, on a one-off basis, you may settle your bill at any time up to and including 31 January 2021 without incurring the penalties and interest charges usually levied on late payments. You don’t have to tell HM Revenue & Customs you’re deferring – it will simply assume you are if you don’t pay – or prove that you’re suffering financial distress.
Six months’ grace
Importantly, this is not an amnesty. You will have to pay the tax in the end and if you miss the 31 January deadline, there will be penalties. Remember too that 31 January is also the date on which you must pay any final tax due for the 2019-2020 financial year, as well as your first payment on account for 2020-2021. So deferring payment could leave you facing a substantial total bill in six months’ time. Before you make a final decision, check your current tax position. Payments on account are only estimates – HMRC assumes you will earn the same amount in each tax year, so if your tax bill for the 2018-2019 financial year was £50,000, your two payments on account for 2019-2020 will automatically be £25,000 each.
However, some people will have earned less in 2019-2020 than in 2018-2019 – not least because the Covid-19 pandemic may have hit their income in the final months of the tax year.
If you think that’s possible, you could file your 2019-2020 self-assessment tax return today to find out exactly what you owe. This return isn’t due until 31 January 2021, but filing it early makes no difference to the deadlines by which you must pay your tax bill – and will give you complete clarity about your real liability.
If what you actually owe today is lower than the payment on account HMRC has asked for, the smaller sum may be affordable. You can pay only this amount and you don’t have to explain to HMRC why you aren’t settling the payment on account that it has demanded in full.
In fact, managing your tax affairs this way makes a great deal of sense in normal circumstances, irrespective of Covid-19. It gives you a true idea of your tax liability, rather than leaving you to rely on HMRC’s estimates. This can also be important in years when your income rises significantly; otherwise the final tax bill you receive when filing your tax return may come as a nasty surprise.
What if you do have the cash to pay your bill in full this week? Well, one option is to defer paying anyway, depositing the money in an interest-paying savings account, perhaps. Accountants typically advise that you settle all debts as quickly as possible, but there’s nothing to stop you holding on to your money for longer than usual this year.
Making Tax Digital applies to all firms
Even the smallest businesses registered for VAT will have to move to HM Revenue & Customs’ Making Tax Digital system from April 2022, the government has announced.
At present only companies with income above £85,000 a year are required to comply with Making Tax Digital, but HMRC has now said it will extend the system to all businesses over the next two years.
Under Making Tax Digital, businesses required to file VAT returns must do so electronically, using specialist accounting software or some other form of link to HMRC’s systems.
While many businesses have been submitting VAT returns online for years, Making Tax Digital takes electronic filing a step further, requiring businesses to invest in new software and get used to using it.
The extension of Making Tax Digital had been due to come into force in April of this year, so many businesses will have prepared for the transition.
However, in March, HMRC announced it was delaying implementation of the rules amid concern that many businesses were preoccupied with dealing with the Covid-19 crisis.
-
London claims victory in the Brexit warsOpinion JPMorgan Chase's decision to build a new headquarters in London is a huge vote of confidence and a sign that the City will remain Europe's key financial hub
-
Rachel Reeves's Autumn Budget: What it means for the UKOpinion A directionless and floundering government has ducked the hard choices at the Autumn Budget, says Simon Wilson
-
London claims victory in the Brexit wars
Opinion JPMorgan Chase's decision to build a new headquarters in London is a huge vote of confidence and a sign that the City will remain Europe's key financial hub
-
Reinventing the high street – how to invest in the retailers driving the changeThe high street brands that can make shopping and leisure an enjoyable experience will thrive, says Maryam Cockar
-
The consequences of the Autumn Budget – and what it means for the UK economy
Opinion A directionless and floundering government has ducked the hard choices at the Autumn Budget, says Simon Wilson
-
The global defence boom has moved beyond Europe – here’s how to profitOpinion Tom Bailey, head of research for the Future of Defence Indo-Pac ex-China UCITS ETF, picks three defence stocks where he'd put his money
-
Profit from a return to the office with WorkspaceWorkspace is an unloved play on the real estate investment trust sector as demand for flexible office space rises
-
An “existential crisis” for investment trusts? We’ve heard it all before in the 70sOpinion Those fearing for the future of investment trusts should remember what happened 50 years ago, says Max King
-
No peace dividend in Trump's Ukraine planOpinion An end to fighting in Ukraine will hurt defence shares in the short term, but the boom is likely to continue given US isolationism, says Matthew Lynn
-
Will the internet break – and can we protect it?The internet is a delicate global physical and digital network that can easily be paralysed. Why is that, and what can be done to bolster its defences?
