Factsheets

Under the self assessment regime an individual is responsible for ensuring that their tax liability is calculated and any tax owing is paid on time.

Tax returns are issued shortly after the end of the fiscal year. The fiscal year runs from 6 April to the following 5 April, so 2006/07 runs from 6 April 2006 to 5 April 2007. Tax returns are issued to all those whom HMRC are aware need a return including all those who are self employed or company directors. Those individuals who complete returns using software are sent a notice advising them that a tax return is due. If a taxpayer is not issued with a tax return but has tax due they should notify HMRC who may then issue a return.

A taxpayer will normally be required to file his tax return by 31 January following the end of the fiscal year. If a completed return is not sent to HMRC on time, an automatic penalty of £100 will be imposed.

The taxpayer does have the option to ask HMRC to compute their tax liability in advance of the tax being due in which case the return must be completed and filed by 30 September following the fiscal year.

Whether you or HMRC calculate the tax liability there will be only one assessment covering all your tax liabilities for the tax year.

HMRC much prefers to deduct tax at source ie from the payer rather than the recipient of the income. But this is not possible for the self employed or if someone with investment income is a higher rate taxpayer. As a result we have a payment regime in which the payments will usually be made in instalments.

The instalments consist of two payments on account of equal amounts:

•  the first on 31 January during the tax year and

•  the second on 31 July following.

These are set by reference to the previous year's net income tax liability (and Class 4 NIC if any).

A final payment (or repayment) is due on 31 January following the tax year.

In calculating the level of instalments any tax attributable to capital gains is ignored. All capital gains tax is paid as part of the final payment due on 31 January following the end of the tax year.

A statement of account similar to a credit card statement is sent to the taxpayer periodically which will summarise the payments required and the payments made.

Example
Sally's income tax liability for 2005/06 (after tax deducted at source) is £8,000. Her liability for the following year is £10,500. Payments for 2006/07 will be:

		£
31.1.2007	First instalment (50% of    2005/06 liability)	4,000
31.7.2007	Second instalment   (50% of 2005/06 liability)	4,000
31.1.2008	Final payment (2006/07    liability less sums already paid)	2,500
		________
		£10,500

There will also be a payment on 31 January 2008 of £5,250, the first instalment of the 2007/08 tax year (50% of the 2006/07 liability).

Interest and surcharges
Interest will be charged on any tax paid late. There will also be interest added by HMRC when tax overpaid is refunded. In addition there will be a 5% surcharge on any tax still outstanding on 28 February following the year of assessment, increasing to 10% if still unpaid at 31 July.

Nil payments on account
Where there is only a modest amount of income tax due, after tax deducted at source has been accounted for, then the two payments on account will be set at nil. This applies if either:

•  income tax (and NIC) liability for the preceding year - net of tax deducted at source and tax credit on dividends - is less than £500 in total or

•  more than 80% of the income tax (and NIC) liability for the preceding year was met by deduction of tax at source and from tax credits on dividends.

Claim to reduce payments on account
If it is anticipated that the current year's tax liability will be lower than the previous year' ...