Jewellery Business Week: Tax and the successful jewellery maker
If you started a jewellery business alongside another job, it is likely that you contacted HM Revenue and Customs and registered as sole trader. This means you have to complete a self-assessment tax return and the end of each tax year. The HMRC then calculates what tax you owe for that past year with you usually have until January to pay.
However, if your jewellery business is a success, and especially if you reduce your other work and the business becomes a more significant part of your income, you may be surprised to find yourself switched to a system called “payment on account” and facing a larger tax bill than expected.
Payment on account comes into force when either the tax you owe when you submit your return exceeds £1,000 or it accounts for 80% or more of the total tax you pay for that year.
It means that you will now need to make payments in advance for your tax. The HMRC will estimate what your next tax bill is likely to be and you will be expected to pay half on 31 January and half on 31 July and then any extra tax or tax rebate calculated on your tax return will be due by the next 31 January (along with your next payment on account). Of course the year when you switch to payment on account you will have to pay the tax for the previous year and the first payment on account, making it a much bigger. The example make this much clearer.
Payment on account example:
Tax owed on 2014/15 tax return £1,100 due by 31 January 2016
Tax estimated for 2015/16 £1,200
1st payment on account £600 due by 31 January 2016
2nd payment on account £600 due by 31 July 2016
Actual tax owed for 2015/16 £1,250
Balancing payment for 2015/16 £50 due by 31 January 2017
This means that on 31 January 2016 the tax to be paid was £1000 (for 2014/15) + £600 (first payment for 2015/16) = £1, 600.
Another £600 is due on 31 July and then finally the balancing payment of £50 is due on 31 January 2017 – but remember the first payment for the next year will also be due so you may have to pay £50 + £650 (payment on account for 2016/17) = £700.
If the total tax owed for 2015/16 turned out to be £1,000, you would find yourself £200 in credit with the HMRC – £600+£600-£1000= £200 tax overpaid.
You could then use this payment against tax for 2016/17.
The payment on account system is designed to spread your tax payments out and make it easier for you and the HMRC to ensure you pay the correct amounts. But it is not well publicised when you are starting out and the big tax bill when you switch on to the system can be a shock.
It is also important if you are on payment by account to keep an eye on the tax you expect to pay each year because if you find that the HMRC estimate is well above what you are likely to pay, it may be possible to have your August tax payment reduced.
For more details check the HMRC website for guides.
Special Business Week offers
Don’t forget about our special offers on business courses for this week only.
- 50% off the Jewellery Business Distance Learning pack
- 25% off business day classes
- Business Bootcamp £699, usual price £750
These offers are only available on booking made during Jewellery Business Week 21-27 February 2016 inclusive. Call 020 3176 0546.