Income tax - Payment methods and deadlines

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Overview

Understanding the methods and deadlines for paying UK income tax is key to excelling in the SQE1 FLK1 exam and building a successful legal career. This guide covers Pay As You Earn (PAYE), self-assessment, penalties, and advanced topics like international taxation and business structures. By understanding these areas, candidates can confidently handle UK tax law and offer sound legal advice.

1. Methods of Income Tax Payment

The UK primarily uses two systems for income tax collection: deduction at source and self-assessment.

1.1 Deduction at Source: Pay As You Earn (PAYE)

PAYE is central to tax collection for employees. It features:

  1. Real-time reporting to HMRC
  2. Tax codes for allowances and adjustments
  3. Flexible updates for changing circumstances

While PAYE simplifies compliance, those with multiple incomes may face challenges.

1.2 Self-Assessment

Self-assessment is required for those with income beyond regular employment. Important details include:

  1. Applies to self-employed, partners, high earners, and those with investment or rental income
  2. Tax year runs from 6 April to 5 April
  3. Need for supplementary pages based on income types

Example: Complex Self-Assessment Scenario

Sarah, a solicitor, works part-time under PAYE, runs a private practice, owns rental property, and receives dividends. Her tax tasks include:

  • PAYE deductions
  • Self-assessment reporting
  • Calculating and paying overall tax liability

This situation shows the complexity of multiple income streams and the need for a detailed grasp of tax systems.

2. Deadlines for Income Tax Payment

Meeting tax deadlines prevents penalties and ensures compliance.

2.1 Tax Return Submission Deadlines

  • Paper returns: 31 October after the tax year ends
  • Online returns: 31 January after the tax year ends

2.2 Payment Deadlines for Self-Assessment

  1. First payment on account: 31 January during the tax year
  2. Second payment on account: 31 July after the tax year
  3. Balancing payment: 31 January after the tax year

Example: Payments on Account and Balancing Payment

Robert, a barrister, owes £45,000 for 2023/24. His schedule is:

  1. 31 January 2024: First payment of £22,500
  2. 31 July 2024: Second payment of £22,500
  3. 31 January 2025: Balancing payment if needed

This highlights the importance of accurate projections to avoid payment errors.

2.3 Exceptions to Payments on Account

No payments on account required if:

  1. Last year's tax bill was under £1,000
  2. Over 80% of last year's tax was sourced directly

3. Penalties for Missing Deadlines

HMRC enforces strict penalties for late submissions.

3.1 Late Filing Penalties

  1. 1 day late: £100 fine
  2. 3 months late: £10 per day (up to £900)
  3. 6 months late: 5% of tax due or £300, whichever is higher
  4. 12 months late: 5% of tax due or £300, whichever is higher

3.2 Late Payment Penalties

  1. 30 days late: 5% of unpaid tax
  2. 6 months late: Additional 5%
  3. 12 months late: Additional 5%

Interest accumulates on late payments, increasing financial strain.

Case Study: Cumulative Impact of Late Filing and Payment

Emma, a solicitor with complex finances, files 8 months late and pays her £20,000 tax bill 12 months late. Her penalties and interest total £5,600, showing severe consequences.

4. Advanced Tax Concepts

4.1 International Taxation

For those with global income, key points include:

  1. Statutory Residence Test (SRT)
  2. Remittance Basis
  3. Double Taxation Treaties

Example: International Taxation Scenario

Dr. Chen, non-domiciled, earns £100,000 from UK and £50,000 abroad. By remitting £20,000 of foreign income to the UK, she reduces her UK tax but loses personal allowances.

4.2 Business Structures and Tax

Different structures affect tax responsibilities:

  1. Sole Traders
  2. Partnerships
  3. Limited Liability Partnerships (LLPs)
  4. Limited Companies

Advising on tax-efficient structures is vital.

4.3 Tax Avoidance and the General Anti-Abuse Rule (GAAR)

GAAR prevents tax advantages from improper setups. It involves:

  1. Defining 'abusive' arrangements
  2. Double reasonableness test
  3. HMRC's power for adjustments

Legal experts must distinguish legitimate planning from abuse.

5. Dispute Resolution and Appeals

Handling disputes with HMRC involves knowing:

  1. Internal Review
  2. First-tier Tribunal (Tax Chamber)
  3. Upper Tribunal
  4. Higher Courts (Court of Appeal and Supreme Court)

Key factors are appealing time limits, burden of proof, and costs.

Conclusion

Gaining a solid understanding of UK income tax methods, deadlines, and advanced topics is essential for success in the SQE1 FLK1 exam and legal practice. This guide addresses PAYE, self-assessment, important deadlines, penalties, and complex issues like international tax and business structures. Staying informed and current with tax law is vital for effective practice.

Crucial points to remember:

  1. PAYE and self-assessment are key tax systems.
  2. Meeting deadlines avoids heavy penalties.
  3. Complex situations need careful analysis.
  4. Knowledge of business structures aids in comprehensive advice.
  5. GAAR and dispute processes are important components of tax law.
  6. Continuous learning is essential in this field.