What are Payments on Account?
Payments on account are advance payments of your tax bill, made twice a year, typically by the self employed. They are intended to help spread the cost of your self assessment over the year. Without careful planning and regular savings they can be a nasty surprise and additional strain on the self employed.
Do I need to make Payments on Account?
Everyone in self assessment must make payments on account each year, unless:
- you’ve already paid 80% or more of the tax you owe at source (such as PAYE deducted from salaries or wages)
- your self assessment tax bill in the previous tax year was £1,000 or less
How are Payments on Account calculated?
Each payment on account is half of last years’ tax bill. For example, if your tax bill for 2014/15 was £2,000, you will have to make two payments on account of £1,000 each, against your 2015/16 tax liability.
When are Payments on Account due?
Payments on account are due by midnight 31st January and midnight 31st July. Check this years’ deadlines here.
What happens to my Payments on Account?
If your tax liability is greater than the payments made in the year, you must make a balancing payment by 31 January. However, if your payments on account are greater than your tax liability HMRC will refund you the difference.
Should you suspect you have overpaid tax, be sure to get your tax return in early to process your refund sooner.
What if my income is lower this year?
If your income is significantly lower in the current tax year than previous, you can request HMRC to reduce your payments on account.
Please be advised, this should only be done if you have genuine grounds to claim a reduction. Should your subsequent payments on account turn out to be lower than your tax bill HMRC will charge you interest.
How can I pay?
Pay your self assessment taxes using any of the following methods:
- Online banking
- Telephone banking
- CHAPS or bacs
- At your bank or building society
- At the post office
- Debit or credit card online
You must quote your 10 digit Unique Taxpayer Reference, followed by the letter ‘K’, as your payment reference.
What if I pay late?
HMRC charge penalties on late payments. There are three penalties, each equal to 5% of the unpaid tax. These are incurred as follows:
- First penalty at 30 days late
- Second penalty at 5 months after the penalty date
- Third penalty at 11 months after the penalty date
I can’t pay, what should I do?
If you are unable to make a payment contact HMRC as soon as possible and you may be able to avoid interest being charged and even agree a payment plan to settle the amount due.
Act quickly! Do not ignore the problem. Contact the HMRC Payment Helpline on 0300 200 3822.
A worked example
2014/15 tax bill of £2,000. £1,500 paid in payments on account. 2015/16 payments would be:
31 January 2016 £1,500, made up of:
- 2014/15 Balancing payment of £500 (£2,000 tax bill less £1,500 paid)
- 2015/16 First payment on account of £1,000 (Half of £2,000 tax bill)
31 July 2016 is the second payment on account of £1,000 (Half of £2,000 tax bill)
2015/16 tax bill was £2,500. Payments on account made above of £2,000. Therefore in January 2017 the balancing £500 is due, together 2016/17’s first payment on account of £1,250 (half of £2,500)
And so on…
We can help you take control of your finances. Get in touch today.