What are payments on account and do I need to pay them?
We are asked this question a lot, especially the first time a customer has to pay them.
Let’s first break down what a payment on account is;
‘Payments on account’ are advance payments towards your tax bill (including Class 4 National Insurance if you’re self-employed).
You have to make 2 payments on account every year unless:
- your last Self Assessment tax bill was less than £1,000
- you’ve already paid more than 80% of all the tax you owe, for example through your tax code or because your bank has already deducted interest on your savings
Each payment is half your previous year’s tax bill. Payments are due by midnight on 31 January and 31 July.
If you still have tax to pay after you’ve made your payments on account, you must make a ‘balancing payment’ by midnight on 31 January next year.
Let’s see an example of how this looks– (Our examples below ignore Class 2 NI and student loan. These are excluded from payments on account. You just pay what is due that year by the 31st January following the end of the tax year.)
CLICK DOWNLOAD PICTURES IF EXAMPLE IS NOT SHOWN BELOW
HMRC expect that you will earn the same or more the following year, so the payment on account is always 50% of the previous tax years bill.
But what if you know you’re going to earn less?
HMRC understand (shock, we know!) that you may earn less in a year than the year before. You could have just had an exceptional year, or maybe you’re winding down or downsizing. In any case you can make a claim to reduce your payments on account.
This is easily done via your self-assessment. Only reduce your payment on account to a level which would cover your following tax bill.
If you don’t do this and you owe HMRC after the 31st July payment (i.e. you’ve reduced it too much) they can charge interest and penalties on the overdue tax.
So if you estimate your tax bill is going to be £2,000 for the following tax bill, down from £2,500, you would reduce your payments on account to be £1,000 in January, and the same in July.
If you have any questions on payments on account, let us know!