EMTACS
Entertainers and Musicians Taxation & Accountancy Services
69 Loughborough Road, West Bridgford, Nottingham, NG2 7LA
Phone 0115-981-5001 Fax 0115-981-5005

About Tax

Look - I'll try to make this interesting but there's no use lying - it's dull but I'll do my best! All figures below are based on 2006/07 figures but we're only talking general principles here:

In rough terms, tax seems relatively simple and the Revenue's slogan of "Tax doesn't have to be taxing" is pretty fair. You add up what your profits are and add on any other income. You take off £5,035. The next £2,150 is taxed at 10% and the next £32,000 is at 22%. After that you pay 40% of the top part of your income.

So - if you earned £20,000 then your first £5,035 is tax free and you owe £2,150 at 10% and £12,815 at 22% - a total of £3,034.30. You subtract any tax that you might have paid already and pay them the remainder. Easy-peasy.

Only it's not quite like that. To keep the government ticking over in money the Revenue have a system of payments on account. So, for 2006/07, they expect to get a payment on account towards the bill in Jan 2007 and a second payment in July 2007. Then in January 2008 you have to settle up any remainder and at the same time make a first payment on account towards 2007/08. The payments on account are worked out as being half the previous year's tax bill.

So if your tax bills are stable, or creep up gently each year, then the system is fine. Suppose your bill is £2,000 for 2005/06; the system will expect two payments on account of £1,000 for 2006/07. Then when it turns out the bill is going to be £2,100 you will owe the remaining £100 in January 2008 and your payments on account for the following year will become £1,050. So January will usually be a more expensive time than July.
The payments on account only apply if your tax bill is more than £500 but this can lead to some problems.

Suppose your tax bill goes down from £2,000 to £400 and then up to £2,500. The first year you make two payments on account of £1,000. Then when you do the Return you've paid £2,000 but you only owe £400 so the Revenue will give you back £1,600 (plus interest!). Also they won't ask for any payments on account because of the small size of the tax bill.

Then when the following year's Return goes in, you owe them £2,500 with no payments on account) PLUS £1,250 as a payment on account for the next year. And of course by this stage you've spent the tax rebate and have no funds to pay the £3,750 they'll demand. Not nice and a good argument to keep your accounts up to date so this doesn't spring out on you at the last minute.

It's one of the reasons why the system delivers quite big changes in tax payments for what appears to be a small alteration in income. Suppose you have a profit of £10,000. You'd have a tax and NI bill of £1,231.50 as a result. Your payments on account will be £615.75. The following year, you earn 10% more - what happens?

Well, your basic tax & NI bill goes up by £300 and the payment on account for the following year goes up by £150. So instead of paying £615.75 you have to pay £1,065.75 which seems and feels unfair. So beware fluctuating profits.