UK Surely I'm paying too much tax?!


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Hello, after some advice on tax from a UK-based accountant!

I am self-employed, and have been self-employed in various capacities since 2014, but sometimes alongside a PAYE job - so my tax history is pretty varied, and I guess I haven't built up a good picture of how it should work. For example, in some years, because I have been working alongside a PAYE job, my Class 4 NI has been very low, and I hadn't anticipated what a massive chunk of my earnings it would be - because the threshold is so much lower than the tax threshold, there isn't a whole lot of difference between my NI bill and my tax bill!

So in January just gone, I paid my tax for the 20-21 tax year, and this amounted to £2490 or something like that. In that year, I had PAYE from April to September (with a bit of self-employed work around it), and from September onwards I was fully self-employed. That would have slightly limited the amount of Class 4 national insurance I had to pay, I suppose. Anyway, through the year, I saved up the money I needed to pay for 20-21 in Jan 2022. Then when I got to January, I found that I also had to pay an almost identical amount on account for 21-22, between January and July of this year. Even though I haven't actually done a tax return for this year yet, as I can't do that until April.

So I couldn't do that with zero notice, and I had to split this extra payment between February and March. I'll give the amounts below. I calculate that I have earned roughly £23k with my new business. Much below the national average. I hope it grows and that I can find better-paying clients, but there we are. Between 31 January 2021 and 31 January 2022, I will have paid more than £7k in tax, class 1 and class 4 NI...about a third of my earnings. Does that sound like it could possibly be correct, to you?! And will it get easier next year, or am I just doomed to pay large amounts every couple of months and never catch up?

Paid already
January 2022: £2,490 (tax for 20-21)
February 2022: £583 (first payment on account for 21-22)
March 2022: £583 (second payment on account for 21-22)

Still to pay
July 2022: £1166 (third payment on account for 21-22)
January 2023: £1168 (balancing payment for 21-22, based on estimated earnings of £23k) + first payment on account for 21-22, which, presumably, will, yet again be around £1100, a third of what I earned in 21-22.

Total = c.£7,090.

Grateful for some advice, as I'm finding this very stressful and don't think it is very sustainable. I earned a lot more in my last paid job, and the proportion I paid in tax seemed to be far lower.
 
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Truemanbrown

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Under the self-assessment system, a taxpayer is required to make payments on account – advance payments towards the eventual tax and National Insurance liability – where the previous year’s self-assessment bill was £1,000 or more, unless more than 80% of the tax liability is deducted at source, for example, under PAYE.

Based on estimated earnings of £23K, the estimated tax liability will be:-

  1. Income Tax - £2,086.00
  2. Class 4 NI - £1,136.83
  3. Class 2 NI - £ 163.80
Your estimated total tax liability for 2021/22 is going to be £3,386.63. Because you have made two payments on account of £2,332 (2 x £1,166), the following payments will become due:-

31st January 2023

Remaining Tax - 2021/22£1,054.63
First Payment On Account - 2022/23£1,693.32
Total£2,747.95

31st July 2023
Second Payment On Account - 2022/23 £1,693.31

You should do this exercise every year because if your profits look likely to reduce then you can make a claim to reduce the payments on account.
 
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Thanks for this response...I think the reason I didn't have to do it previously was because I moved between PAYE and SE positions. Anyhow, it's been a rubbish year for tax, but I think I'm in the rhythm now – and at least in January it'll only be a balancing payment, unlike this year, which was the full amount, plus the payments on account. So it has been a lot of tax in one year proportionally, but I think it'll be the only one like this.
 

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