Sole trader planning ― payments on account

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Sole trader planning ― payments on account
  • Calculating payments on account
  • Reducing payments on account

This guidance note discusses some of the planning points that can arise around payments on account.

Payments on account are essentially a part of the compliance process. However, it can be a very good time to put forward certain simple planning points. It is a natural time to communicate with clients, and they will be particularly focused on tax issues given that they have an impending payment.

Aside from talking to clients about payments on account, it is a good time to conduct a review of future profits of the trade. Other points can also be considered, such as pension contributions, business expenditure, deferring income and so on.

Often the challenge is persuading clients to think further ahead. Payments on account are useful for this because the amounts due can be calculated quite far ahead. For a 30 April year end, two years ahead can be calculated with reasonable accuracy. See Example 1.

Calculating payments on account

Cash flow can be a key consideration for sole traders. How sole traders account for their tax liabilities varies from client to client. Some sole traders will set aside money well in advance, whereas others will try to find the money closer to the date of payment.

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