Setting up your sport and fitness business as a UK sole trader comes with a bit of tax territory to explore. We're here to help you navigate the twists and turns of Payment on Account – those periodic payments that keep HMRC in the loop about your earnings. Let's dive in!
The Timings: When Your Tax Bill Comes Knocking
When you embark on your journey as a sole trader in the world of sports and fitness, the due date for your first tax bill generally isn't until January 31st following your first tax year.
For instance, consider a swim coach who kicks off their sole trading venture in June 2023. Their tax year concludes on April 5th, 2024, and the inaugural tax bill isn't due until January 31st, 2025.
Although this can be handy not having to pay taxes as soon as you start your business, unless you've got your financial cushion in place, that once-a-year payment might feel like a hefty punch to your pocket. Enter HMRC's "Payments on Account."
What's the Deal with Payments on Account?
Think of Payments on Account (POA) as mini-advances on your tax bill. Sole traders like you need to make two of these payments each year – on January 31st and July 31st. Each POA is pegged at 50% of your last tax year's total tax bill. For instance, if last year's tax bill stood at £4,000, you'd need to make POA payments of £2,000.
But, hold on! Not all sole traders need to dive into the POA pool. If your tax liability from the previous year was under £1,000 or if more than 80% of your tax was already handled through PAYE, you might be spared from POA. But do double-check with HMRC or a tax professional to be sure.
Why do I need to make Payments on Account?
POA isn't about adding more hoops to your financial journey; it's designed to help spread the tax load throughout the year. This setup can be a lifesaver for those with substantial tax bills, ensuring the financial strain isn't too heavy. It's like dividing a marathon into two halves – a lot more manageable, right?
How are Payments on Account Calculated?
Calculating your POA is straightforward: It's half of your last year's tax liability. HMRC assumes your tax burden remains steady or increases. For instance, if your tax liability was £10,000 last year, your POA would be £5,000.
Payments on Account: Dates and Deadlines
POA comes with strict timeframes. The first installment, along with any balance from the previous year, is due on January 31st during the tax year. The second payment is scheduled for July 31st after the tax year. Missing these deadlines spells trouble, leading to penalties and interest. Stay ahead by marking these dates on your calendar and planning accordingly.
In your debut POA year, brace yourself for a bigger bill than anticipated. In our swim coach's first year, they have a tax liability of £10,000 plus the initial POA of £5,000 adds up to a total of £15,000 due on January 31st after the tax year ends.
Reduce your Payments on Account
If you foresee lower profits in the upcoming tax year, you can request HMRC to lower your POA. But beware, if you underestimate and your profits surprise you, HMRC might slap you with penalties and interest.
Payments on Account Real-Life Example
Let's put theory into action. Our swim coach, starting as a sole trader in June 2023;
Tax Year 1: June 23 to 5th April 24
Tax liability £10,000 due Jan 31, 2025
POA: £5,000 due Jan 31, 2025
POA: £5,000 due Jul 31, 2025
Tax Year 2: 6th April 24 to 5th April 25
Tax liability £16,000 (already paid 2x £5,000 POA)
Balancing figure of £6,000 due Jan 31, 2026
POA: £8,000 due Jan 31, 2026
POA: £8,000 due Jul 31, 2026
Conclusion
Understanding Payment on Account is your key to managing taxes as a sole trader. By grasping the calculations, deadlines, and potential effects on your finances, you can stay on top of your tax responsibilities and navigate this financial terrain with confidence.