Why do I have to pay an amount of tax for next year now?
Why is my bill so high?
This 90 second video hopefully explains the payment on account situation and why/how it comes about.
Essentials of transcript:
HMRC would like every person to be employed and paying tax on a monthly basis. The self-employed don’t get the opportunity to do that and they pay their taxes on the 31st of January, which means HMRC can wait mainly up to 18 months to get their money. The decision was made many years ago that, for the self employed, if they owe HMRC more than a £1000 of income tax & class 4 National Insurance, then they have to pay a further 50% as a payment on account at the same time paying the main tax bill. On the 31st of January, not only are you settling the in year tax bill, you’re also paying 50% of the same amount as a payment on account for the following year.
However, it doesn’t end there. What you also need to do is pay a further 50% of your in year tax bill on the 31st of July. So therefore effectively you’ve paid 100% of your potential tax bill ahead of when you actually have to file it. The good news is though, if you file following year your tax return early you will discover whether you have to make the July payment on account and potentially you could get the money back. When you do pay the following years tax bill, you need to remember to offset the payment on account already made, as HMRC won’t remind you of this.