Unexpected tax bill?

This is the time of the year when many contractors and freelancers turn their attention to their personal finances, triggered by the 31st January deadline to file their personal tax returns. It is also the time of the year when self-employed professionals interact most with their accountant, particularly when that unexpected tax bill hits. Many approach this time of year with trepidation, awaiting the annual personal tax bill along with their accountants fees to hit and hoping they have held enough money back to pay this.

Having worked in personal tax since the introduction of self – assessment I have summarised below what I think are the two main issues on contractor’s minds as they review their personal tax returns:

1. I wasn’t expecting to have to pay any tax?

The unexpected personal tax bill is perhaps one of the biggest bug bears of a contractor or freelancer, particularly those who are new to it. Your company has paid tax so you shouldn’t have to, right? Not necessarily. If your combined personal income exceeds the higher rate tax band you will need to pay personal tax. The amount depends on how proactive your accountant has been and whether you have kept a track of your tax position throughout the year. Most accountants will prepare the company accounts and personal tax return after the end of the tax year when it is too late to do anything about it. This may result in some borderline dodgy accounting to reflect the most favourable tax position, but if you have taken too much out of your company (which you could have left in if you had known how much tax you would have to pay). You could lose 25% of your dividend in higher rate tax just because your accountant was not proactive.

This doesn’t have to be the case. Look for a proactive accountant who can deliver regular estimates of your company and personal tax position. It’s something that we have been working on and have now launched a Personal Tax Tracker that automatically calculates both your personal and business tax, providing you with an up- to-date picture of your tax position whenever you need it. It ensures you’re never in the dark about your financial affairs and can plan and react accordingly, with no nasty surprises.

2. What are Payments on account?

Not only may you have encountered an unexpected tax bill but this may be for more than one years tax! If you meet the required criteria you may have to pay all of your tax for the last tax year and 50% of the tax for the current year as well on 31st January. The remaining 50% of the current year’s tax bill will then be paid by 31 July. This can seriously impact your cash flow if not expected. This is a particular issue facing first time contractors and highlights the need to ensure you have the right support to help you through.

I would advise you not to just accept that the payment on account is correct, this is just an estimate and if you believe the tax bill for the current year will be lower than that of the previous year you can reduce the payments on account. To do this you need to have visibility on your current year’s tax position as if you reduce the payments on the basis your income has dropped and it transpires that this is not the case you will be charged interest. How can this be managed? The key to managing these tax bills is to have the necessary financial information available to you as a small business owner. This information should cover both company and personal tax and should be something your accountant can help you with without charging you additional fees!

We have been looking after contractors for almost 20 years and one of our particular strengths is helping new contractors to get through the early years with no nasty surprises. For more information on how we do this please call one of our specialist advisors on 0800 230 0213 or request a FREE call back.