Tax Digest

If you’re self-employed or submit a Self Assessment tax return in the UK, there’s a good chance you’ve had this moment:

“Hang on… why am I being asked to pay more tax when I’ve already paid what I owe?”

Welcome to Payments on Account — one of HMRC’s most confusing (and least loved) systems. It often feels unfair, confusing, or like a sneaky cash grab. But there is a reason it exists — even if HMRC isn’t great at explaining it.

Let’s break it down in plain English.

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What Is Tax on Account?

A Payment on Account is essentially an advance payment towards next year’s tax bill.

Instead of waiting until the end of the next tax year and then asking for one big lump sum, HMRC asks certain taxpayers to pay their tax in stages.

If you qualify, you usually pay:

• 50% of your estimated next tax bill by 31 January
• The remaining 50% by 31 July

These payments are based on your previous year’s tax bill.

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Who Has to Pay It?

You’ll usually be put on Payments on Account if:

• You’re self-employed, a sole trader, or receive income not taxed at source
• Your last Self Assessment tax bill was over £1,000
• Less than 80% of your tax was collected through PAYE

Employees who only earn through PAYE normally don’t deal with this at all — which is why it often feels like a shock when you first go self-employed.

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Why Does HMRC Do This?

Short answer: cash flow and risk management.

Longer answer: HMRC doesn’t want to wait up to 22 months to collect tax from people whose income isn’t taxed automatically.

Here’s what would happen without Payments on Account:

• You earn money in the 2024/25 tax year
• The tax year ends in April 2025
• You submit your return in January 2026
• You pay the tax then

That’s a long time for HMRC to wait — and a long time for taxpayers to potentially spend money that was never really theirs.

So instead, HMRC spreads the cost and:

• Gets tax earlier
• Reduces the risk of non-payment
• Helps taxpayers avoid a single huge bill (in theory)

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Why It Feels So Painful

Payments on Account hurt most in your first few years of self-employment.

That’s because, in January, you’re often paying:

1. The full tax bill for last year, plus
2. 50% of next year’s estimated bill

It can feel like you’re being taxed twice — but you’re not. You’re just paying ahead of time.

Example:

• Your tax bill for 2023/24 is £6,000
• HMRC assumes 2024/25 will be similar
• In January you pay:
  • £6,000 (what you owe)
  • £3,000 (first payment on account)

Total January bill: £9,000
Ouch.

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What If Your Income Drops?

This is where Payments on Account get slightly fairer.

If you know your income is going to be lower next year, you can apply to reduce your Payments on Account.

But — and this is important — if you reduce them too much and end up underpaying, HMRC can:

• Charge interest
• Potentially add penalties

So it’s a balancing act: reduce them carefully, not optimistically.

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What Happens at the End of the Year?

Once your next tax return is submitted:

• HMRC recalculates what you actually owe
• Any overpayment is:
  • Refunded, or
  • Set against future tax

So the money doesn’t disappear — it just sits in HMRC’s hands longer than most people would like.

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The Real Reason People Hate It

Let’s be honest: the problem isn’t just the system — it’s the communication.

HMRC:

• Rarely explains this clearly upfront
• Uses confusing language
• Doesn’t prepare new self-employed people for the first big bill

So people feel blindsided, stressed, and sometimes panicked — even though the tax itself isn’t new.

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The Bottom Line

HMRC makes you pay tax on account because:

• Your income isn’t taxed automatically
• They want tax collected earlier and more reliably
• It smooths payments over time (even if it doesn’t feel like it)

It’s not a penalty, and it’s not extra tax — it’s timing.

Once you’ve been self-employed for a few years and plan for it properly, Payments on Account become predictable. Still annoying — but predictable.

And in the world of tax, predictable is about as good as it gets.

Get in touch with us at Shenkman Accountancy if you might be able to pay on account for the first time!

How Accounting Software Might Help Your Business

Managing finances is one of the most important — and often most challenging — parts of running a business. Within the world of small business, keeping track of income, expenses, and taxes can quickly become overwhelming. This is where accounting software can make a real difference.

Accounting software is designed to simplify financial management, reduce errors, and give you clearer insight into your business performance. While it won’t replace professional advice in every situation, it can be a powerful tool to support smarter, more confident decision-making.

Saving Time on Everyday Tasks

One of the biggest benefits of accounting software is automation. Tasks that once took hours — such as entering transactions, reconciling bank statements, or generating invoices — can often be completed in minutes.

Many platforms automatically import bank transactions and categorize them for you. Instead of manually tracking every payment or expense, you can review and approve entries, freeing up valuable time to focus on running and growing your business.

Improving Accuracy and Reducing Errors

Manual bookkeeping increases the risk of mistakes. A missed decimal point or a forgotten expense can throw off your entire financial picture. Accounting software reduces this risk by using standardized processes and built-in checks.

By keeping everything organized in one system, you’re less likely to lose receipts, duplicate entries, or overlook important transactions. Accurate records are especially important when it comes to taxes, audits, or financial planning.

Gaining Real-Time Financial Insights

Accounting software doesn’t just store numbers — it helps you understand them. Most tools provide dashboards and reports that show cash flow, profit and loss, outstanding invoices, and expenses in real time.

Having access to this information allows you to:

• Monitor your financial health at a glance
• Identify trends or potential issues early
• Make informed decisions about pricing, spending, or expansion

Instead of guessing where your business stands, you can rely on up-to-date data.

Making Tax Time Less Stressful

Taxes are a common source of stress for business owners. Accounting software can help by tracking deductible expenses, calculating sales tax or VAT, and organizing financial records throughout the year.

When tax season arrives, your information is already prepared and easier to share with an accountant or tax advisor. This can save time, reduce stress, and help ensure compliance with regulations.

Enhancing Collaboration

Accounting software makes collaboration easier between business owners, accountants, and team members. Instead of sharing spreadsheets back and forth, everyone can access the same up-to-date information securely.

This transparency improves communication, speeds up problem-solving, and ensures that everyone is working from the same data.

Finally… being ready for Making Tax Digital

Accounting software is a key aspect of HMRCs new Making Tax Digital rules which come into place in the 2025-26 tax year. Being comfortable in using and interpreting accounting software could make this transition smoother.

Get in touch to find out more about how using Accounting Software could help your business!

The 2025 budget has been one of the most talked about on record – but how will it affect your finances going forward from the 2026-27 tax year?

Increase in Tax on Dividends

– Dividend tax rate increasing from 8.75% to 10.75% and higher rate dividend tax is increasing from 33.75% to 35.75%. This will particularly affect our clients with Limited companies who take a small salary with dividends – slightly more tax will be going to HMRC!

Increase in tax on Land and Property Income

– 2% increase on all land and property income taxes – 20% to 22% at basic rate, 40% to 42% at higher rate and 45% to 47% at the additional rate. This will affect our clients who receive land and property income.

Personal Allowances

– No change! Income tax personal allowances will remain at £12,570 until 2030-31 ISA Changes – As part of a plan to get people investing their money, the allowance for contributing to a cash ISA will be cut from £20,000 to £12,000. Stocks and Shares ISAs are unaffected and the allowance will remain at £20,000.

Capital Gains Tax

– No change! CGT had been increased in the last budget, but the rates are staying the same for now NI on Landlords – This has not been incorporated into the latest budget which is a victory for those with land and property income

Driving an Electric Vehicle

– You may have seen in a previous Tax Digest post about the benefits of buying an electric car through your business. Now, EV drivers will pay 3p per mile as an additional tax from 2028.

NB – There are significant changes made to how SALARY SACRIFICE works however this will mainly affect clients who are employed. These changes will come into place in April 2029.

Get in touch to find out more or to ease any worries you might have about the next tax year 2026-27

If you are a small business owner, it always sounds like a good idea to get a ‘company car’ through the business. For many, this is a great way of reducing their corporation tax liability and gaining a useful asset which can be used for both business and personal purposes. Yet, many self employed individuals are unsure of the tax implications of owning a vehicle and using it for personal journeys – what does this mean for your personal tax liability?

Benefit in Kind

A benefit in kind is the tax levied on the benefits provided to an employee or director by a limited company. A tax is required when a company provides an employee with a benefit because this benefit is usually provided at a greatly reduced cost than if the employee was to purchase/rent the asset themselves. For instance, if a company wanted to give an employee extra salary to pay for the rent of a vehicle, they would pay tax on this additional salary. There is no difference between an increase in salary and receiving the ‘cash equivalent’ of a salary increase via a benefit in kind such as a company car.

What does this if you have a company car?

Any employee/director in possession of a company car and who receives the car for personal use will be taxed on the value of the ‘benefit’. This is calculated via a scale charge percentage and the list price of the vehicle. HMRC and the government try and influence our behaviour via tax legislation, so generally this benefit will be lower (you will pay less tax) if the car has lower CO2 emissions to encourage a nationwide move towards more sustainable vehicles. There is no benefit in kind levied upon vehicles that are solely for business use and there is a flat rate benefit charged on commercial vehicles such as vans.

To avoid paying excess personal tax, it might be more cost effective to log your business mileage rather than purchasing a car through the business – to avoid incurring a benefit in kind. It is important to weigh up the value of a company car (it might be a newer model and therefore useful to you as the user) against the tax implications of driving it for personal use.

We operate payroll and have a full range of personal and corporation tax services available – so get in touch to see how we might be able to optimise your future tax planning with regards to company vehicles!

With many of our clients being sole directors of their Limited Company, the most tax efficient way of receiving income has often been to take a director’s salary and then declare dividends within a self assessment tax return. A director’s salary is a deductible expense against any company profits and dividends as a basic rate taxpayer are taxed at 8.75% rather than the traditional 20% for basic rate taxpayers.

Yet, with the upcoming changes to employers national insurance, such a strategy as a sole director or ‘one man band’ Limited Company has become less viable. The lower earnings limit (the maximum salary that you could take as a sole employee without incurring Employers NI) has been reduced from £9096 per year in 2024-25, to £5004 per year in 2025-26.

The reduction in directors salary of £4092, in simple tax terms costs the director:

£778 in corporation tax for lower rate corporation tax payers and £1023 for higher rate corporation tax payers. It also requires an extra £4092 to be taken as dividends at a cost of £358. So the cost to a Limited company affected would be betweem £1000 and £1500!

The solution?

Adding just one employee to your payroll as a director can get you the EMPLOYERS NI ALLOWANCE of £5000. This would enable the director to take the full director’s salary of £12,570 (to maximise their personal allowance) and not be subject to the employers NI charge. It is important to note that the salary paid to the additional employee must be commensurate with the role that they would have as an employee at the company.

This is a common predicament that we have experienced with many clients… could this issue also apply to you!

Many of you will have received a recent letter in the post or a notification on your HMRC app about the upcoming HMRC Making Tax Digital legislation. This is coming into place from 6th April 2026.

It has certainly crept up on us, both as accountants and also for self employed individuals and landlords who will now need to report differently to HMRC.

The fundamentals of the change are as follows:

1). Sole traders and landlords will now need to keep digital records of their earnings and expenses

2). Quarterly updates to HMRC are required

3). You are required to submit your information via MTD for the 2025-26 tax if you receive more than 50k from rental income OR more than 50k from self employment income in your 2024-25 tax return. The threshold will be 30k for either source of income for the 2026-27 year

What kind of software is compatible?

These software packages might be completely alien to you… but its likely that you have seen them advertised on various forms of media

– Quickbooks

– Xero

– Sage

There are lots of other forms of software available and you can still use HMRCs free software if you would prefer 🙂

Do you think that the MTD changes might affect you? Get in touch to see how we might be able to help!

Following on from our last blog post about claiming a ‘working from home’ expense from either your employer or within your self employed accounts – let’s delve deeper!

As discussed, with many self employed traders preferring to ‘work from home’ from the relative comfort of a membership club, many of these clubs have started to provide dedicated office facilities and work stations so that their members can enjoy this added benefit of flexible office working.

By taking this into account, we should surely be able to expense the full club membership within sole trader or Limited company accounts?

HMRC take a different approach to this. Even though popular clubs such as Soho House, David Lloyd and Total Fitness now offer meeting rooms and excellent wifi – the fact that these clubs also offer leisure facilities means that there is no clear distinction between the business and leisure proportions of the monthly membership fee.

As such, simply paying for your monthly membership out of your business account still fails the HMRC criteria for an expense – with the expense needing to be ‘wholly and exclusively’ for the purpose of running the business. As previously mentioned, a leisure club membership would fail this test.

Ok the good news! We can still expense any wholly business related visits to a club and these should be properly recorded within your accounts. Taking a client for lunch at your club or logging a week of work and the hours that you have worked could be expensed back to the company. HMRCs regulations are still strict on this though! So you would have to prove that these specific visits were exclusively for business and not for leisure, if challenged by HMRC.

Sounds tricky but with the help of an accountant, you can definitely maximise the potential of any flexible working spaces that you use. Get in touch to find out more!

After COVID, the amount of people who now work a few days a week from home has skyrocketed. Such is the quality of conference call software such as Teams or Zoom that we can communicate with colleagues without the stress of a morning commute. With working from home therefore becoming an option to many employees, there also comes an inevitable cost to the employee. But is this expense available to everyone?

How can I go about claiming this?

You can put in a claim for working from home expenses within your self assessment tax return if you are self employed (meaning you in theory have no fixed place of work), or alternatively you can find out more via your government gateway account if you are in full time employment. You must have proof from your employer that you are required to work from home to justify receiving any expenses for working from home.

If you are an employee with hybrid/remote working arrangements you cannot claim tax relief because in the eyes of HMRC, you have the option to use your employers office/work space. This even extends to if your employer has an office but you cannot work there because it is at full capacity! Talk about cracking down!

Get in touch to enquire about whether you are entitled to claim expenses for working from home! It could make all the difference to your next tax return 😊