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Understanding Self-Assessment Tax & Payments on Account

Chris White • November 24, 2023

Tax time can be a puzzling period, especially when it comes to self-assessment tax. But fear not! Let’s break it down in simple terms.

 

 What's Self-Assessment Tax?

 

Think of self-assessment tax as your opportunity to report your income and any applicable expenses to Her Majesty's Revenue and Customs (HMRC). It's essentially you telling the taxman how much you've earned and calculating how much tax you owe.

 

 How Does It Work?

 

1. Income Declaration: You jot down all your income sources - be it from your self-employment, side hustles, or even rental income. Anything that brings in the cash needs to be on that list.

 

2. Expense Deductions: Now, here's the cool bit. You get to deduct allowable expenses. Say, if you're self-employed, expenses related to your business like office supplies or travel costs can be subtracted. This reduces your overall taxable income.

 

3. Tax Calculation: Once your income and deductions are sorted, it's time to calculate the tax owed. The amount you owe depends on how much you've earned and the tax rates for that specific year.

 

4. Payments: HMRC expects you to pay your tax bill. This can usually be done in a lump sum or through a payment plan.

 

 What Are Payments on Account?

 

Payments on account are like advance payments for your next tax bill. They're calculated based on the current year's tax bill. HMRC takes your tax owed for the previous year, splits it into two, and expects you to pay half in advance for the next tax year. This is assuming your next tax bill will be similar.

 

 Why It's Important:

 

1. Avoiding a Big Bill: Payments on account help break down your tax bill into smaller, manageable chunks throughout the year.

 

2. Staying On Top: By making these payments, you're continuously chipping away at your tax liability, which helps prevent a large lump sum due at the year's end.

 

3. Adjustments: If your next year's tax bill ends up being less, HMRC will refund the excess you've paid. On the flip side, if it's more, you'll need to pay the balance.

 

 Wrap-Up:

 

Self-assessment tax and payments on account may seem daunting at first, but they're just ways to ensure you're paying the right amount of tax throughout the year based on your income. Keep your records tidy, declare your income accurately, and don't forget those allowable expenses - they're your friends when it comes to reducing your tax bill! If in doubt, it's always a good idea to consult with an accountant to make sure you're on the right track.

MTD ITSA FAQ – Everything You Need to Know

By Chris White • January 17, 2025
MTD ITSA FAQ – Everything You Need to Know

What Is MTD ITSA, and How Will It Affect Self-Employed Individuals?

By Chris White • January 17, 2025
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is a major shift in the way self-employed individuals and landlords in the UK manage and report their taxes. This government initiative aims to modernize the tax system, reducing errors and streamlining the process. If you’re self-employed or a landlord, MTD ITSA will affect how you record your income and file tax returns. Here’s everything you need to know about what it is, how it will impact you, and how to prepare for the change. What Is MTD ITSA? MTD ITSA stands for Making Tax Digital for Income Tax Self Assessment . It builds on the government’s Making Tax Digital initiative, which is already in place for VAT. MTD ITSA focuses on digitizing how self-employed individuals and landlords report their income tax. Under MTD ITSA, you’ll need to: Keep digital records of your income and expenses. Submit quarterly updates to HMRC using MTD-compatible software. File an End of Period Statement (EOPS) and a Final Declaration to confirm your annual income and tax obligations. Who Does MTD ITSA Apply To? MTD ITSA will roll out in phases: April 2026 : Applies to self-employed individuals and landlords with an annual income exceeding £50,000. April 2027 : Expands to those earning between £30,000 and £50,000 annually. Future plans for individuals earning below £30,000 are still under consultation, so it’s essential to stay updated. How Will MTD ITSA Affect You? Digital Record-Keeping If you currently use spreadsheets or paper records, you’ll need to switch to MTD-compatible software to maintain digital records. Quarterly Reporting Instead of submitting one annual Self Assessment tax return, you’ll file four quarterly updates summarizing your income and expenses. End-of-Year Submissions You’ll still finalize your accounts at year-end, but the process will be streamlined with digital tools. More Transparency With quarterly updates, you’ll have a clearer view of your tax obligations, reducing surprises at year-end. What Do You Need to Do to Prepare for MTD ITSA? Check if MTD ITSA Applies to You Review your annual self-employment or rental income to determine when you’ll need to comply. Choose MTD-Compatible Software Popular options include QuickBooks, Xero, and FreeAgent. We can help you select and set up the right software for your business. Organize Your Records Ensure your income and expenses are up to date and transition from paper records to digital systems. Learn the New Process Understand how to submit quarterly updates, End of Period Statements, and the Final Declaration. Seek Professional Advice Navigating MTD ITSA can be challenging, especially if you’re new to digital accounting. A trusted bookkeeper can guide you through the process and ensure you remain compliant. How CW Licensed Bookkeeper & Accountant Can Help At CW Licensed Bookkeeper & Accountant, we understand that MTD ITSA can feel overwhelming. That’s why we’re here to make the transition as smooth as possible. Here’s how we can support you: Tailored Advice We’ll help you understand how MTD ITSA impacts your specific situation and create a plan to ensure compliance. Software Setup and Training We’ll assist in choosing, setting up, and training you on the best MTD-compatible software for your needs. Quarterly Reporting Support Let us handle your quarterly updates to HMRC so you can focus on running your business. Year-End Submissions From the End of Period Statement to the Final Declaration, we’ll ensure your year-end reporting is accurate and timely. Ongoing Support We’re here to answer questions, provide troubleshooting, and keep you on track with MTD requirements.  Get Ready for MTD ITSA Today! MTD ITSA is a significant change, but you don’t have to navigate it alone. With CW Licensed Bookkeeper & Accountant by your side, you can make the transition stress-free and compliant. 📧 Contact us today at info@cwabc.co.uk 📞 Call us on 07306 812321 Let us help you prepare for the future of tax reporting!

Making Tax Digital (MTD): A Complete Guide for Businesses and How Accountants Can Help

By Chris White • December 29, 2024
Making Tax Digital: What It Means for You and How to Prepare
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