Monday, June 01, 2009

Schedule of tax payments including 'on account'

The way the Inland Revenue handles payments on account and closing tax payments once books are closed on the tax year continues to puzzle me. This is my current understanding.

Take the reference date to be today, June 1st 2009.

In the tax year 07/08 I earned £X with tax T(X).

In the tax year 08/09 I earned £Y with tax T(Y).

In January 09 I paid my first 'on-account' amount of T(X)/2 forward projected from 07/08 into 08/09 as the IR's best estimate of the tax I would pay in 08/09.

In January 09 I also paid the balance of my o7/08 tax, i.e. T(X) minus whatever I had paid previously on account in January and July 2008 (further explanation below).

In July I have to pay the second "on account" amount T(X)/2. *

In January 2010 I have to pay the balance of my tax for 08/09 = T(Y) - T(X)

--- [T(X) = the two 'on-account' payments].

In January 2010 I also have to pay my first 'on-account' payment for 09/10 which is computed by the IR as T(Y)/2. The second equal installment will be paid in July 2010.

There. Clear now?

* But last year the Inland Revenue increased the amount I had to pay 'on account' in July 08 based on the return which I completed in May 08 for tax-year 07/08. The IR concluded that they had under-estimated in 06/07 how much I would make in 07/08 and they clawed back the excess immediately, rather than waiting until January 31st 2009.

I have no idea what their criteria are for doing this, but I know you are obligated to tell the IR ASAP after the end of the tax year if the sum of the two on-account payments for that tax year are less than the tax you actually owe (once you've worked it out).