5 Things Freelancers Should Know about Tax Payments

Freelancers and other self-employed often have a difficult time when it comes to paying taxes. If you are required to pay taxes through HM Revenue & Customs and you make payments on an account for your Class 4 National Insurance and income tax, there are a few things that you need to understand:

1. Payments on account are simply payments that you will make toward your income tax and your Class 4 National Insurance costs for the upcoming income tax year. If your National Insurance bill is more than £1,000 or if less than 80 per cent of that income is deducted before you receive your money, you will need to make payments on account.
2. Every payment that you make should be about half of the tax bill for the previous year. For instance, if your tax bill for the 2011 tax year was £1,000 then the payment on account for the upcoming year will be £500 and this is what you will need to pay by the end of July in the current year.
3. If your tax bill increases and you have yet to pay the appropriate amount on account you will need to ensure that you have paid the difference by the end of January. Pay whatever amount you still owe to HM Revenue by 31st January of the next year. For instance, if you still owe for the 2011/2012 year, you will need to ensure that you are all paid up by 31st January 2013.
4. Payment on account can be difficult to decipher and even more difficult to pay because they are relatively high for the first year. If this is the first year that you are required to pay them, they can be more than a full year’s worth of National Insurance and income tax.
5. If you do not keep your payments up, the penalties can be even more difficult to meet. Interest charges can be added on top of your required payments as well as a £100 penalty that is automatically added on top of your taxes and interest. If you go as long as three to six months without paying, your penalties will be even higher.