Personal Finance: The year of the bumper tax bill

Self-employed workers face a self-assessment shock, warns David Oliver

MANY self-employed tax payers will face a nasty shock in the new year and may need to curb their enthusiasm for Christmas spending. They face a tax bill in January that could be more than twice the size of last January's payment, as the full effect of the changes brought about by self-assessment and the move to taxation on the current year's income instead of the previous year's come into operation.

Those self-employed people who have been in business since before 1994 and who have experienced rising profits in recent years are particularly vulnerable. Under the old system the self-employed were taxed on their profits for the previous tax year. So, for someone with a 30 June year end, the assessment for, say, the tax year ending on 5 April 1993 (the 1992/93 tax year) would have been based on the profits to 30 June 1991. If profits were rising, this clearly gave them a massive cashflow benefit.

The introduction of self-assessment did two things. Firstly, it introduced a current year basis of assessment, so the taxable income for a given year is determined by looking at the accounting period ending in that year. Secondly, it introduced a new payment system under which the tax bill for a year is settled in three parts: two provisional instalments in January and July, then a final payment the following January.

To make the change from a prior-year basis to a current-year basis the Inland Revenue brought in a transitional year, 1996/97. During that year the taxable profits were determined by using the average of the two accounting years ending in 1996/97. Tax payers felt the benefit of that low 1996/97 assessment when they paid provisional instalments for 1997/98 due on 31 January 1998 and 31 July 1998, because those instalments were based on the previous year's tax liability, rather than their current liability. This favourable outcome means that many self-employed will have been lulled into a false sense of security by these payments, thinking that all their bills will be at the same sort of level.

For them the day of reckoning is looming on 31 January. On that day two things happen. First, there is likely to be a big back payment to catch up with their tax for 1997/98. Second, the first provisional instalment for 1998/99 falls due. This will be half the tax for 1997/98, which of course was the first year under the full current year system. It's a double blow, a ticking bomb.

For example, Mr Robinson draws up accounts to 30 June. In the year to 30 June 1995 he earns pounds 25,000 and his profits have been increasing at the rate of 25 per cent a year since then. On 31 January 1998, depending on his circumstances, he will have made a payment of under pounds 3,500. On 31 January 1999 his bill will be around pounds 8,500!

If you are self-employed and potentially in this position, what can you do? First, look at your pattern of earnings over recent years and find out how much the problem affects you. If possible, calculate your 31 January 1999 liability as early as possible. Next, determine how you are going to meet that liability and plan your cash flow very carefully. It may be possible to make a payment into your pension scheme now, elect to have it treated as paid in the previous tax year and so reduce your 1997/98 taxable income.

Do, though, take proper professional advice.

For further queries, contact the press officer, Rebecca Harding, on 0171-304 8639.

David Oliver, is a partner at Arthur Andersen.

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine