Payments on Account- Everything You Need to Know
*This is a live article - we'll update this from time to time to keep the information up to date.
Payments on Account. A term that many business owners, including those self-employed, have probably heard before. You may have come across these before, or it might be your first time but this article will aim to explain Payments on Account, so you know what they are, when you have to pay and how it is all calculated.
So what are Payments on Account?
Payments on Account are advanced tax payments to HMRC. These payments go towards next years' tax bill with the aim of making it more manageable.
Who will have Payments on Account?
Anyone with a personal tax liability of over £1,000 will need to make Payments on Account for the following year. This is all part of your self-assessment. You also need to have paid less that 80% of your tax at source i.e. your tax is taken before you are paid like PAYE.
When are the payments due?
There are two Payments on Account each year. The first is with your current tax liability on 31st January and the second is on 31st July.
How much do I have to pay?
They are worked out with two payments of 50% of your last tax bill, including your Class 4 NIC if you happen to be self-employed.
Michael is self-employed and has to pay £3,200 in tax and Class 4 NIC for the 16/17 tax year. The full amount is required to be paid by 31st January 2018.
Because Michael doesn’t pay tax at source and his liability is greater than £1,000, Michael will have to make Payments on Account on top of this towards the following 2017/18 tax year. The payments will be due by 31st January 2018 and 31st July 2018 and will be £1,600 each (50% of the previous year’s tax bill).
Therefore, on 31st January 2018, Michael will have to pay £4,800 = £3,200 tax liability + £1,600 first payment on account. The second payment made on 31st July 2018.
When Michael comes to complete his 2017/18 tax return, he will have already paid £3,200. So if his tax bill came to £3,800, he would only have to pay £600 which is known as the ‘balancing payment’. Michael will then have to make Payments on Account again for the 2018/19 tax year of £1,900 each on 31st January 2019 and 31st July 2019.
What happens if my tax bill is lower the following year?
HMRC will issue you a refund if you've paid Payments on Account and it ends up leading to an overpayment. This will be due to your following tax liability being less than the previous year. You can also opt to reduce or remove your Payments on Account if you feel they are inaccurate but if you turn out to be wrong then HMRC will charge interest on the underpayments so only do so if you are sure your circumstances will be different in the following year. You can reduce your Payments on Account when submitting your tax return, online or by submitting form SA303.
You can track your Payments on Account and how much you've paid to date via your online portal with HMRC directly. You can login here with your username and password or set an account up if you haven't already activated your online account. However, feel free to contact us here if you would like any more information on Payments on Account.
About the author
Ben Nacca is an accountant but is nothing like the stereotype you have visualised in your mind! He has worked in the accounting industry for almost a decade and is CEO here at Cone.
Ben loves travelling the world, playing video games and playing his acoustic guitar whenever he finds the time between spending time with his two chihuahuas, Hugo and Pablo!