Today is the deadline to prepay your tax for 2017-18 if you file a tax return. If you’re feeling the burden of a hefty bill, here’s how to bring it down in future.
If you pay tax via self-assessment and HMRC has told you to make a payment on account, 31 July is the last day you can do so. This payment will go towards your next tax bill, with the balance due on 31 January 2019 (along with your 2017-18 tax return).
We explain what you need to pay and how to bring down your bill in future.
- Get a headstart on your 2017-18 tax return with the Which? tax calculator – tot up your bill and file direct with HMRC.
1. Reduce your payment on account
If you completed a self-assessment tax return last year, you may need to pay advance payments in two instalments, known as payment on account. Instalments are due on 31 January and 31 July. These are calculated as half the income tax and national insurance for your previous year’s bill.
On 31 January 2019 you will need to settle your outstanding bill for the year if your earnings have increased, or if you owe other taxes such as capital gains tax.
Sound confusing? Here’s a simple example:
- you owe £2,000 tax in 2016-17
- on 31 January 2018, you pay the £2,000 bill for the 2016-17 tax year. You also pay £1,000 towards your 2017-18 bill
- on 31 July 2018, you pay £1,000 more towards your 2017-18 bill
- by 31 January 2019, you file your 2017-18 tax return, and find you owe £2,200
- by 31 January, you’ll need to pay the £200 balancing payment, plus £1,100 towards your 2018-19 bill.
That’s what happens if your tax bill increases. But if it goes down, you can write to HMRC to reduce your payment on account.
You’ll need to tell them how much you plan to pay and the reasons for that. This makes sense if, for example, you’re self-employed and had an unusually lucrative year.
But be careful. If you declare a lower expected income just to reduce your payments on account you could face a much larger bill when January rolls around, and could be charged interest on the underpayment.
- Find out more: paying tax when you’re self-employed
2. Max out your Isa and savings allowances
Generally, money you earn from interest is considered income and should be taxed, but you have a number of options to bring down your bill.
All basic-rate taxpayers benefit from a £1,000 personal savings allowance, meaning you can earn this much in interest before payment is due. Higher-rate taxpayers can earn £500 tax-free; there’s no allowance for additional-rate taxpayers.
You can also take advantage of your £20,000 Isa allowance. You won’t save tax when you put the money in the Isa, but all future interest, dividends or capital growth will not be taxed. Savings and investing in Isas over the long term can let you build up a substantial tax-free income.
You can also transfer old Isas without eating into your £20,000 allowance, so make sure you don’t have money sitting in poorly paid accounts. If you’re transferring, check that the new account allows transfers in.
- Find out more: how to transfer your cash Isa
3. Tax-deductible expenses
There are plenty of legitimate business reliefs and allowances that self-employed people can claim to reduce their taxable income. Make sure you declare any business expenses you are entitled to.
You can claim for costs related to running your premises, like heating, lighting, cleaning, rent and even business rates. If you work from home, you may be able to claim a portion of these costs.
Any costs incurred during business travel, including breakfast and evening meals, can be claimed. And if you employ people, you can claim for the costs of their wages, National Insurance, pension and training.
- Find out more: tax-allowable expenses
4. Plan your business purchases
If you’re a business owner, you’ll pay tax on your taxable profits, which are your yearly takings, minus business expenses and allowances.
You also have a £200,000 allowance for investment in plant and machinery. These purchases can be deducted from your taxable income.
So, for example, if you’ve had your eye on a new laptop, purchasing it in a tax year where your profits are especially high may bring down your overall bill.
Keep in mind that there are restrictions. You can’t claim for equipment you already own, the purchases must be for business (rather than personal) use, and you can only claim in the year the purchase was made.
- Find out more: capital allowances
5. Delay your high-value asset sales
Capital gains tax is payable when you profit from selling an asset – such as shares, a business or valuables like jewellery, antiques or art.
You’re able to make up to £11,700 in the 2018-19 tax year, though this tends to fluctuate. If you’re a married couple or civil partner, you can pool your allowances to £23,400. These amounts can be deducted from any profits you make from the sale.
On the excess, you could pay up to 10% as a basic-rate payer or 20% as a higher or additional-rate payer with most assets, rising to 18% or 28% on second homes or buy-to-let properties.
Before selling a valuable asset, ask yourself the following:
- What other capital gains have you already made this year? If your allowance is used up already, it may be worth waiting until the next tax year.
- Has your partner used up their allowance? You’re able to transfer property to your spouse tax-free, provided it’s a genuine gift.
- Are you likely to fall into the basic-rate band this year, or could this push you into a higher bracket? If your income fluctuates, it may be worth waiting for a year when you’re in the basic-rate bracket.
Find out more: capital gains tax on property
6. Entrepreneurs’ relief
Are you selling a business as a sole trader or business partner, or shares where you have voting rights and at least a 5% stake?
If so, entrepreneurs’ relief will mean mean you’ll pay 10% capital gains tax, which is a substantial discount for higher or additional-rate payers.
7. Choose the right accounting year
When you file your return, you’ll need to provide your profits for the ‘accounting period’, which is usually 12 months. But you can choose when your accounting year ends, and change the date if you need to.
If you choose a date early in the tax year, you’ll have more time to pull together your accounts and time contributions to your pension. So, for example, if you choose an accounting year ending on 5 April, in the tax year 2018-19 you’ll be taxed on profits for the year 6 April 2017 to 5 April 2018.
- Find out more: paying tax when you’re self-employed
8. Pay into your pension scheme
To encourage saving, the government rewards you for contributions to your pension scheme with tax relief.
You can earn 20% pension tax relief as a basic-rate payer, 40% as a higher-rate payer and 45% as an additional-rate payer. If you’re on the 21% tax band in Scotland, you can reclaim the extra 1% through your tax return.
For the 2018-19 tax year, the maximum you can deposit is £40,000, and any additional contributions will be taxed at your highest rate. But you can carry forward unused allowances from the previous three years.
You can work out how much you’d save in tax with our pensions tax relief calculator.
9. Keep your paperwork in order
The better your records, the easier you’ll find it to do your tax return – and the less likely you are to miss a major deduction.
You should keep records for at least five years from 31 January in the following tax year, in case HMRC wishes to query your return. It can be sensible to keep them for longer, as HMRC could potentially look back 20 years if it suspects fraud.
Having your paperwork in order will also prevent you submitting your return or payment late. A late tax return could saddle you with a hefty fine.
While you won’t be fined if you miss the 31 July deadline, you might start incurring interest and face a higher bill.
- Need help filing your 2017-2018 tax return? Use the Which? tax calculator to file online.