Do I Need to Make Payments on Account?

Do I Need to Make Payments on Account?

You can spend most of your working life blissfully unaware of any HMRC jargon, letting PAYE do its thing. But then decide it’s time to venture into the unknown and become your own boss, and before you know it, tax jargon is coming at you from all angles.

At some point, as inevitably as tax itself, you’ll encounter Self Assessment, and before you know it, payments on account. Intended to make paying your tax bill easier, payments on account can also be an unwanted surprise, which is why we thought we’d share our guide to what they are.

So, what are payments on account?

Payments on account are essentially there to spread the cost of paying tax through Self Assessment. They work on the assumption that you’ll make the same amount or similar in the next tax year as you did in this one.

This can be both a blessing and a curse, but you’ll need to be aware of them if you either:

  • Owe more than £1,000 in tax from self-employment to HMRC
  • If less than 80% of your tax bill has already been collected at source (so this will be referring to the likes of PAYE)

Think of payments on account as a pre-payment towards next year’s tax bill. But because HMRC aren’t psychic and don’t know what next year’s tax bill will be, they just assume it will be the same as this year’s.

Is there any way around payments on account?

There’s no escaping from this one. The minute you submit your Self Assessment, HMRC will calculate your tax bill. If the bill comes to more than £1,000, or if less than 80% of the tax you paid this year was deducted at source, you’ll automatically become liable for payments on account.

What will my first year with payments on account look like?

It’s well worth preparing yourself for the possibility of making payments on account, so you aren’t hit with unexpected bills.

They can feel like a burden because you’re paying some of next year’s taxes in advance, even though you haven’t earned the money yet.

It’s why it’s so important to keep track of your bookkeeping and potential tax bill throughout the year!

In this example of making payments on account, your tax bill is £1,000 in your first year, and £1,500 in tax in your second year

    • Your first tax year ended 5th April 2024 (the 2023/24 tax year), and you must pay your £1,000 tax bill before 31st January 2025.

    • Because your 2023/24 tax bill hit the £1,000 threshold, you must also make payments on account towards the 2024/25 tax year.

    • The 2024/25 tax year runs 6th April 2024 – 5th April 2025, but the deadline for submitting your 2023/24 tax return is 31st January 2025. This means you won’t actually know what you owe for 2024/25 just yet, so HMRC assume the bill will be the same as it was for 2023/24.

    • Payments on account are made in two equal instalments. The first half is due at the same time as your 2023/24 tax bill (before 31st January 2025).

    • That means you’ll need to pay £1,500 by 31st January 2025. This amount is made up of your £1,000 tax bill, and £500 which is your first payment on account for next year’s tax. It can really hammer your cash flow if you’re not expecting it!

    • Then before 31st July 2025 you would need to pay the remaining £500, which will be your second payment on account towards next year’s bill.

    • Once you get to the end of your second year, 5th April 2025, HMRC will know you owe £1,500 in tax, but due to splitting the cost with your payments on account, they’ll be able to see that £1,000 has already been paid, leaving £500 left to pay for that tax year.

    • The bill for the tax year which ends 5th April 2025 is due before 31st January 2026. You’ll need to pay the £500 balance, plus the first payment on account for the following year. HMRC will assume that your bill for the following year is £1,500, so you’ll need to pay half of that amount on top of the £500.

  • There would then be the remaining £750 to pay by July 2026.

 

But what if my profits change from one year to the next?

HMRC calculate your payments on account by assuming you’ll owe an identical amount to the previous tax year. But if you make less profit, you’ll owe less tax, so big changes to your profits can really disrupt things.

HMRC predictions can end up skewing our tax bills, but they do eventually balance themselves out. If your payments on account mean that you overpay on tax one year, you’ll always receive it back when the tax year is over.

Obviously not all of us can wait until the end of the tax year, so there is an option to request for HMRC to reduce your payments on account.

Before you do that though, we strongly recommend some careful analysis of your income, outgoings, and profits first. If you estimate you’ll make much less, but then make a lot more, HMRC will demand the difference straight away and might even charge interest on top.

If you want to reduce payments on account you can submit a request to HMRC.

What should I do if I’m struggling to make payments on account?

We’d recommend either chatting with Citizens Advice, to HMRC themselves, or better yet, speaking to your accountant who can look at your options.

They’ll be able to help you estimate how much your business can afford to pay, so when you go to HMRC, you’ll be ready with a realistic payment plan .

Looking for more advice on all things finance and accounting? Head over to our Freelancer Finance section where we’ve got a whole hub of handy guides ready to help you out.

Do Freelancers Need a Separate Bank Account?

Do Freelancers Need a Separate Bank Account?

Freelancing can be a really great gig, but it can be super tough at times too. Between managing your schedule, maintaining client relationships, going after new business, and chasing payments, it can often feel impossible to find time to do any work. “There are plenty of hours in the day”, said no freelancer ever.

It’s hardly surprising that the idea of setting up a separate bank account just for the business can seem like a right royal pain, but it can actually make things easier in the long run.

In fact, depending on how you set up your business, it might even be a legal requirement.

In this article, we explain when a separate business bank account becomes a legal obligation, and why most accountants recommend it anyway.

 

Does a limited company need a separate bank account?

If you operate your business as a limited company then yes, you will need a separate bank account. Your limited company is a totally separate legal entity, even if you’re the only owner and director, so keeping the finances separate is a requirement.

This distinction can sometimes be a deciding factor for start-ups when choosing a legal structure for their business. Because the company has its own legal and financial identity, any debts belong to the business, so there’s less risk to your own individual assets if things go wrong.

That’s why, as a limited company, it’s a legal requirement to set up a business bank account for your company which is independent of your own personal banking.

 

Are you set up as a sole trader?

Unlike limited companies, having a separate bank account is not a legal requirement for sole traders. Where the owner of a limited company is treated as a separate legal entity from their business, a sole trader is not.

This means that your personal and professional finances are inextricable in the eyes of tax and the law. Unfortunately, this also means you’re personally liable if the business hits any financial hurdles, putting your own money and personal assets at risk.

But although it’s not a legal requirement for sole traders to have a separate business bank account, there are plenty of good reasons for doing so anyway.

 

The pros and cons of having a separate bank account

Keeping your accounts separate is generally considered best practice for businesses. It makes it easier to track and manage the finances, so your accounts are more likely to be accurate, and there’s less risk of any errors creeping in.

Has all this got you thinking? Let us walk you through some of the benefits of setting up a bank account just for your business.

 

Having a separate bank account can make bookkeeping easier and more accurate

When your financial accounts are kept separate, keeping the books up to date is much more straightforward. With an independent business bank account, you can link it straight to your bookkeeping software without your personal finances getting dragged in too.

Your bookkeeping will automatically populate with your bank transactions, helping you stay up to date with much less effort.

Better bookkeeping is the secret to running a successful business. You’ll be able to keep an eye on the finances, follow up late payments, and stay more tax efficient. It even makes it easier to spot all those business expenses that you can offset against your tax bill.

 

Simpler tax returns

When it comes to tax return time, whether you’re filing a Self Assessment as a sole trader or a Company Tax Return as a limited company, separate bank accounts are a blessing.

You won’t need to pick through every single transaction to decipher what was personal and what was business-related. Your tax returns will be more accurate and therefore less at risk of penalties.

 

Credibility

Having a business account means you can make and take payments through a separate bank. This will boost your reputation in the eyes of your clients and suppliers, making your business appear more established than it might be.

 

Complying with some banks

Some banks insist that you have a separate business bank account, so it’s worthwhile getting one set up to eliminate any stumbling blocks for yourself further down the line.

 

Better budgeting boundaries

When you divide your personal and business finances, you’ll have a clearer picture of what’s what. Keeping your personal budget as a separate pot away from your business will help you protect cash flow and savings in both areas of your life.

 

Protecting your business credit score

Having a healthy business credit score is crucial for things like loans and investments. If your personal credit score isn’t so great and your finances are combined, this won’t stand your business in great stead.

 

More flexible transactions

Money is often constantly moving through business bank accounts and with personal accounts, there are typically tighter restrictions on things like withdrawals and transfers. Opening a business bank account will give you the financial freedom you need to operate your business efficiently.

 

Physical bank card separation

Another great benefit of separate bank accounts is different bank cards so that you can keep your personal and professional spending physically divided to avoid confusion. This is particularly important if you ever employ any staff who have access to bank cards too.

Whilst setting up a separate bank account might seem like extra effort, it’s fair to say that the benefits far outweigh any inconvenience. In fact, you could even choose to use the same bank for both sets of finances.

Some banks offer special access to interest rates or lending facilities not available to other customers, and you’ll be able access your accounts through the same banking app. In today’s scroll-savvy digital age, that could be particularly welcome.

 

Done here? Navigate over to our info hub for more freelance support and guidance.

Do Freelancers Need Insurance?
Can I Still Charge for A Project Which Didn’t Work Out?

Can I Still Charge for A Project Which Didn’t Work Out?

Unfortunately, this question is right up there with ‘how long is a piece of string?’. The short answer is that it all really depends on a whole host of variables, such as:

  • The reason the work wasn’t completed
  • The kind of relationship you have with the client
  • External influential factors which neither party can do much about

In most cases a commonsense approach is probably what’s needed, but freelancing isn’t always so straightforward.

So, let’s take a look at some examples of what happens when a project doesn’t work out, and what this means for billing. In some cases, charging the client might be appropriate, but there might be times when invoicing is off the cards.

 

When is it ok to charge for unfinished work?

In the following instances you’re most probably well within your rights to still charge a client, even if the project doesn’t quite go to plan.

 

If the reason it didn’t work out wasn’t your fault

We’ve all had that client where, no matter what we do, things just don’t work. If a freelance project doesn’t work out and it’s the clients’ fault, then you can definitely still charge them for your work!

A (surprisingly common) example of this is a personal trainer who has been working with a client to help them lose weight in the run-up to their wedding or a holiday. The personal trainer can only do so much to support the client, and ultimately, if they don’t follow the plan their PT provides, they won’t hit their goal weight. But that doesn’t mean they don’t have to pay the bill.

 

When the client swoops in with a change of plan

This one’s a bit trickier. If you and your client agree the brief, and then they change their mind, it depends on the timing.

  • If you haven’t started the work then unfortunately, you can’t really charge anything for your services (unless you have terms and conditions which say otherwise)
  • However if you’re part-way through something then it’s perfectly reasonable to request payment for the work you’ve done so far, or to compensate you for any materials bought specifically for that job.

 

If the client changes their mind about work you’ve completed

Our clients hire us for the expertise we bring, so there are very likely to be times that you find yourself on a job where the client isn’t entirely sure what they want the finished project to look like. It’s why it’s so crucial to get the brief right!

If you’ve already completed the work and it nails every point on the brief, but then the client changes what they need, then yes – they should absolutely pay you for the work carried out so far.

It’s up to them if they want to issue you with a brand-new brief for a refreshed direction and pay you for that too.

 

Examples of situations where you probably can’t charge

On the flip side, there are likely to be times where you either straight-up can’t charge the client, or you probably shouldn’t.

This is an important distinction to make because there could be times when billing the client simply isn’t an option at all, but at other times going ahead might be ethically or professionally questionable (and therefore best avoided).

 

Illness or other personal circumstances

If you’ve agreed to a project but then fall ill or become unable to fulfill the work as a result of other personal circumstances, such as the death of someone close, the client shouldn’t be expected to pay.

However, there are grey areas around this topic too. If your illness or personal circumstances means you have to pause or delay a project, but the client is happy for you to resume or start the work at a later date, then you can probably still charge as normal.
 

If the project doesn’t go ahead

In the world of business and project planning, not everything runs according to plan. Unfortunately, even after agreeing a brief, a project can still draw to a sudden halt.

As frustrating as this is, you can’t charge a client if you haven’t actually executed any work unless you have an agreement in place that says otherwise.

If you’ve spent time attending meetings or briefings, there might still be room to discuss invoicing to compensate for this. That will be between you and your client.
 

If you miss crucial deadlines

If the client is forced to deviate from their project strategy as a result of you missing deadlines or not producing work to the standard they expect, your right to bill them is on shaky ground, particularly if you’re looking at charging full price.

If the client must get somebody else to step in as a result of any of your own shortcomings, you will need to come to an agreement as they might want you to reimburse them for this inconvenience.

Of course, there’s a very easy way to ensure this scenario doesn’t arise and that’s to meet deadlines, produce great work, and manage client expectations. Did we mention how important it is to get the brief right?!
 

The benefits of client contracts and agreements

All of the scenarios above are general examples but ones you might come across when working as a freelancer. There’s rarely a definitive answer as to whether or not you can still charge for a project that doesn’t work out, so it pays to protect yourself as much as possible. One of the best ways to do this is by putting a contract or agreement in place with your client before you start any work for them.

This will also help you in situations that neither you nor your client could foresee or prevent. The Covid pandemic is a classic example of this, causing many clients and their contractors to abandon work.

In a contract or agreement, both parties can detail any insurance cover they have which might impact payment for projects or work that doesn’t take place.

An official document like this is also the perfect place to implement a milestone payment plan that you and your client can agree on. This means that rather than getting paid once all the work has been completed, you can decide on several milestone payment dates along the way.

Not only will this give you peace of mind when it comes to your cash flow, the client might also appreciate the breakdown of costs. Win, win!

Want to know more? Check out our Freelancer Hub for all things freelancing!

The Trading Allowance for Freelancers
National Insurance for Freelancers
The Freelancer’s Guide to CIS Tax

The Freelancer’s Guide to CIS Tax

If you’re planning to work as a sub-contractor in the construction industry, then it’s worth knowing that most construction-based trades will fall under the Construction Industry Scheme. CIS affects how you get paid by the contractor who hires you, so this blog takes a closer look at what CIS is and what you need to do.

 

A quick introduction to CIS tax

CIS was introduced in 1971 to ensure that tax is collected from payments made to subcontractors in the construction industry. With a few exceptions, any business operating in the construction industry will be classed as a “contractor” under CIS and will need to register.

If you are a freelancer carrying out work for a contractor that is registered with CIS, you will be classed as a “sub-contractor” and will also fall within the rules of CIS. There are a few exceptions to this, for both contractors and sub-contractors. The main exceptions are:

  • Architects and surveyors
  • Scaffolding hire (with no labour)
  • Carpet fitting
  • Material delivery
  • Work on construction sites that is obviously not related to construction, such as catering and facilities management

 

What does CIS mean for contractors and sub-contractors?

A contractor that is registered with CIS must deduct a fixed amount from the payments they make to sub-contractors. The amount they deduct depends on whether the sub-contractor is registered or not:

  • Registered: The contractor deducts 20% from the subcontractor’s payment, and submits it to HMRC.
  • Not registered: 30% deduction
  • Gross Payment Status: 0% deduction

The deduction is paid directly to HMRC and is treated as an advance payment of the subcontractor’s tax and National Insurance Contributions (NIC).

 

Does CIS depend on how I work?

CIS applies to sole traders, partnerships, and limited companies, both as contractors and sub-contractors.

So, if you are in a trade or profession that falls within CIS, and you carry out work for a CIS registered contractor, you are automatically within CIS.

 

How CIS works in practice

 

Verification

Before you carry out work for a contractor, they will need to verify you with HMRC. They’ll need your Unique Taxpayer Reference number (UTR) and NI number if you’re a sole trader or in a partnership, or your company UTR if you’re a limited company.

It’s important to give the contractor the correct information, including the exact trading name you’ve registered with HMRC. If the details are incorrect, you will be classed as unregistered and pay the higher deduction of 30% – ouch!

After they submit the request for verification, HMRC will tell the contractor how much to deduct. You can still carry out work for the contractor without being registered for CIS but will pay 10% more in deductions. So, it pays to register, and can make managing your cash flow easier.

If you do pay the 30% rate, you’ll be able to reclaim any overpaid tax as a rebate once you submit your Self Assessment. So, it also pays to get that in sooner rather than later!

 

Deductions

The contractor submits a return to HMRC once a month and you receive a statement or payslip showing the gross payment and amount that’s been deducted.

This is probably not the amount you will actually owe in tax and NICs as, unlike the PAYE system for employees, the deduction is a flat rate and doesn’t take into account your personal allowance or any other earnings you might receive. The personal allowance is the amount of income you can earn before starting to pay tax on it.

When you fill in your Self Assessment tax return you’ll enter the amount of deductions paid under CIS, and HMRC calculates whether you owe more tax and NIC, or are due a refund.

 

Gross Payment Status under CIS

As a sub-contractor, you can apply for Gross Payment Status if your business passes several tests which are mainly:

  • Your business does construction work in the UK (or provides labour for it)
  • A good track-record of paying tax and NIC on time
  • Turnover of at least £30,000 per year, excluding VAT and cost of materials
  • In the case of partnerships or limited companies, then it’s at least £30,000 turnover for each partner or director, or £100,000 for the whole partnership or company

HMRC will confirm if you have Gross Payment Status, and you will receive payments without deductions. You will then have to show the gross payments on your Self Assessment or company tax return, and pay the appropriate tax and National Insurnace on it.

 

Responsibilities under CIS

It’s important to know who is responsible for what under CIS. Firstly, you need to decide whether you are a contractor or sub-contractor. It sounds obvious, but you can be both! For example, if you are engaged by a contractor to carry out a particular job, then you are acting as a sub-contractor. But if, in order to do the job, you then take on sub-contractors yourself you are now also acting as a contractor.

 

Contractor’s responsibilities

Whilst you can work as a sub-contractor without registering with CIS, you have a legal obligation to register if you act as a contractor.

The contractor must verify the sub-contractor’s status before work commences and then they are responsible for deducting the correct amount, filing a monthly return, and paying the deduction to HMRC. They must also provide a monthly statement or payslip showing pay and deductions.

Contractors must also keep records of all payments and deductions for sub-contractors for at least 3 years, along with various other reporting responsibilities regarding changes in their business.

 

Sub-contractor’s responsibilities

As a sub-contractor, your main responsibility is to provide accurate information for the verification process, and to maintain records of payments received and deductions made. This information will be on the monthly statement or payslip you receive.

Whilst you do not legally have to register for CIS, it makes good sense to register as you’ll pay 10% less in deductions.

It’s also important that you understand that CIS is not a replacement for the Pay as You Earn (PAYE) system for employees. You must account for tax yourself under Self Assessment if you’re self-employed, or a company tax return if you’re a limited company.

 

Accounting for tax as a freelancer under CIS

It’s common to overpay tax under CIS because the deductions don’t take into account your personal tax allowance, or any tax relief that you can claim on allowable expenses .

If you’re owed a refund, the sooner you submit your self-assessment return, the sooner you’ll receive what you are due so it’s worth doing it early. And if that all seems like a headache, why not get a professional to do it for you.

Do Freelancers Need To Register A Limited Company?
How Much Should I Charge?
Managing Your Cash Flow as A Freelancer