THE BENEFITS OF FILING EARLY

The process of filing taxes can feel overwhelming. While it may be tempting to put it off until the last minute, there are several benefits to filing your taxes early that extend beyond mere compliance…

US Tax Return Filers 

The IRS interest rate is now 8%(!) so it is more important than ever to pay your taxes early… 

  • Extension PaymentTax is payable to the IRS on April 15th following the end of the tax year, regardless of whether you have filed an extension. Interest will accrue from this date on anything you owe with your return (and late payment penalty will accrue from June 15th). Preparing your tax return early, will give you the opportunity to make an extension payment to avoid any unnecessary interest and penalties. You may even be able to file the tax return before the deadline and avoid the admin burden of filing an extension. 

 

  • Estimated PaymentsIf you owe more than $1,000 with your tax return, the IRS will require you to make advance payments towards the next tax year. These are known as estimated payments. The first estimated payment is due on April 15th and is based on the previous year’s tax liability. To make accurate estimated payments, you must prepare your tax return before April 15th. If you fail to make estimated payments that were due, the IRS will charge an Underpayment of Estimated Tax penalty. The penalty is essentially an interest charge (at 8%!) from the due date of the first payment.

Check here to get information on how to calculate estimated payments and whether you should be making them.   

 

  • Penalties for Late FilingIf you file your tax return after the due date without an approved extension, the IRS imposes a late filing penalty of 5% of the amount of unpaid taxes for each month (or part of a month) that the return is late, up to a maximum of 25%. For the taxpayers residing outside US, this penalty starts accruing from June 15th instead of April 15th. To avoid complications near the deadline, it is always recommended to file early.  

 

  • Foreign Tax Credit PlanningUS taxpayers with foreign sourced income can offset their US tax liability by claiming a credit for taxes paid to a foreign country (subject to terms of the relevant tax treaties). If you are a UK taxpayer, a credit is usually available for UK taxes paid during the calendar year. The mismatch of payments and income can be problematic due to the differing tax years in the US and UK. It is generally advisable for US taxpayers to complete their UK tax filings and payments by December 31stMoreover, untaxed income (e.g. partnership profits, investment income, capital gains etc) generated from April to December may need an additional pre-payment to HMRC before December 31st. This will ensure that there are sufficient tax credits available to offset the US tax liability.

It is important to have an open conversation with your tax preparer about your current and expected income for the year so you can plan your UK tax payments accordingly.  

 

UK Tax Return Filers 

The tax return must be filed and the balance due paid on, or before, 31st January following the end of the tax year. However, there is no reason why it cannot be filed much earlier. In fact, there is often a benefit to doing so… 

  • CashflowFiling your tax return early will give you more notice to pay the tax that is due or enable you to receive any available refund sooner. It is important to note that filing early doesn’t mean paying early mandatorily. The tax can still be paid on 31st January without attracting any interests and penalties (subject to foreign tax credit planning (see above)). The benefit to preparing your tax return in advance, is that you will have time to plan your payments accordingly without any last-minute surprise tax bills.  

 

  • Pay through your Tax Code – If your tax liability is under £3,000 and you submit your tax return online by 30th December (or paper file by 31st October), you can opt to have the tax collected through your PAYE Tax Code (see here for more information on PAYE Tax Codes). The benefit here is that the liability will be collected directly via your employment income (or pension) in equal payments to the end of the tax year, leaving your savings unscathed. This is not automatic and the option must be selected when filing your tax return.  

 

  • Payment on accountsIndividuals who owe more than £1,000 and have less than 80% of their tax liability collected at source, will need to make two advance payments towards their next year’s tax liability on 31 January and 31 July. These “Payments on Account” are calculated as 50% of your previous year’s liability, which may not necessarily be an accurate representation of what you will owe next year. For individuals who expect to owe less, it would be beneficial to prepare your tax return before the second payment on account is due in July. This will enable you to only pay the amount that is due and avoid any unnecessary overpayment.   

 

  • Avoid Interests & PenaltiesLeaving your tax filing until the last minute may put you at a risk of missing the deadline which can result in penalties and interest charges. There is an automatic penalty of £100 for not filing by the 31st January deadline and interest will accrue on anything you owe from that date. See here for more information on Penalties for Missing UK Filing Deadline. 

 

In summary, it’s always better to start preparing your tax return early. We understand that there may be reasons why you need to file later in the year, but that shouldn’t stop you getting yourself organized way in advance of the deadline.