Ask any self employed person what their worst months are and they will immediately reply "January and July because that’s when I have to pay my tax."

However, there are times when you seem to pay a lot more than what you expected, and others when you pay a lot less than you though (hooray!).

Why is this? What is a balancing payment? What is a payment on account? How much interest do HM Revenue and Customs really charge and what do you do if you think you’re paying too much?

Before reading the example, please read the final paragraph at the end of the article first!

Let’s get straight into the nitty gritty with an example of a dentist who has been in business many years.

Tax calculated on taxable profits for the year ended 31/05/06 - £30,000

Tax calculated on taxable profits for the year ended 31/05/07 - £40,000

Tax calculated on taxable profits for the year ended 31/05/08 - £45,000

The first thing here is deciding which tax year each accounting year relates to. This depends on which tax year the last date of the accounting year falls into. The tax year runs from 6 April to 5 April each year but not everyone has a 5^th April year end (tax – so simple- don’t you just love it?!)

So, Year end 31/07/06 falls into 06/07 (as 31/05/06 is between 6 April 2006 and 5 April 2007) y/e 31/05/07 falls into 07/08 and Y/e 31/05/08 falls into 08/09.

The next thing to note is that every year, you must make payments on account of the next tax year to HMRC. They are always based on last year’s tax liability.

This would mean in our example that the payments on account of taxation for 07/08, would be based on the actual taxation for 06/07.

Each payment on account, is always half of the previous years liability and is payable in January and July.

This means that payments on account of 07/08 would be payable in January 2008 and July 2008. Each of these would be half of 06/07 (so £15,000 each).

Now, by January 2009, you must submit your tax return for 2007/2008. At this stage, you know the taxation for 07/08 was actually £40,000.

You have already paid two lots of payments on account towards this (totalling £30,000) so that means that a balancing payment of £10,000 is required in January 2009. This then settles 07/08.

Now on to 08/09. Remember you have to make payments in advance in January and July? This means that as well as paying the balancing payment, you also have to pay towards next years tax, i.e half of 07/08, which is £20,000 in January 2009 and £20,000 in July 2009. This means by the 31^st of January 2009, you must pay (brace yourself!) £30,000 (£20,000 payment on account of 08/09 and £10,000 balancing payment for 07/08)

By the same token, if you had actually overpaid, rather than having a balancing payment to make, you would receive a refund (Yippee!).

I can now see you burning to know the answer to the next question, which was how much interest HMRC charge. The rate is currently 3% (Interestingly, the rate of interest they pay on repayments is only 0.5%!). Also, they levy a 5% surcharge on balancing payments that remain unpaid after 28 days.

For those amongst us having difficulty paying our tax as we do not have the means – I would suggest speaking to your specialist dental accountant. There may be various things that can be done to reduce your tax but that depends on individual circumstances so I am sure you will understand I can’t go into details here. (Sorry!)

For those amongst us who have difficulty paying our tax because we don’t like handing money over to HMRC – I’m afraid you will just have to put on your best grimace and write that cheque (or for the technologically savvy amongst us – pay online!)

For the many dentists, who have no inclination to try and understand the UK tax system, rest assured, your specialist dental accountant will, I am sure, be happy to just tell you how much to pay and when. However, for those of you who want to understand, we believe in talking things through and addressing any concerns, a view which is I am sure echoed by all other good specialist dental Chartered accountants!