How do payments on account work?
When you complete your self-assessment tax return, you’ll be asked to make payments on account towards your next tax bill. How do these payments work?
HMRC introduced payments on account to help you spread your tax payments throughout the year instead of paying all in one go. The next deadline is on 31st July, so here’s our guide to help you understand how they work.
How payments on account work
When you complete your self-assessment tax return, your tax account will show how much tax you owe. If you’re self-employed, the total will also include your Class 4 National Insurance payments. You can spread the cost over two payments, due by midnight on the 31st of January and the 31st of July. There are exemptions if you owe less than £1,000 in tax, or if you paid more than 80% of your tax another way, for example through PAYE.
Payments on account are designed to ensure that you’re always ahead with your tax payments, so you won’t go into arrears. The two payments you make are basically advance payments against next year’s tax bill.
Your tax account will show the figures and tell you how much you need to pay by each date, but how are they calculated?
How are payments on account calculated?
HMRC calculates your payments on account based on your estimated earnings for the year ahead. They estimate that your earnings next year will be roughly the same as those in the previous year. In practice, this means that each payment on account will be half of the tax you owed on the return you’ve just completed.
If you’ve had a bad year and earned less than the previous year, you might find yourself with a credit in your tax account. That means you can claim a tax refund and get the money back. Alternatively, you can leave it in your tax account to cover future payments. It’s a good idea to get professional advice to help you decide which option to choose. We can help you create a financial forecast and decide whether you’re better off getting the money back into your business or ensuring you’ve got future tax payments covered.
If you’ve earned more than expected, your previous payments on account won’t cover your full tax liability, and you’ll need to make a balancing payment.
Balancing payments
You’ll often need to make a balancing payment if you’ve earned more than you expected to. It can include higher income tax if business is booming and sales have increased. Your tax liability might also go up if you’ve sold an asset and need to pay capital gains tax. Planning ahead and using your tax allowances can help you spread the cost and reduce the impact; we can guide you and help you make a plan.
HMRC calculates balancing payments by looking at the total tax you owe and subtracting the payments on account you’ve already made. The balancing payment is the difference between the two. The calculation differs depending on whether you’ve made payments on account in the previous year or not.
You must make the balancing payment, along with your payment on account, by 31st January the following year.
How to check what you need to pay
You can check how much you need to pay on account and when the next payment is due by logging into your HMRC online account or using the HMRC app. You’ll need your 12-digit user ID and password, and complete a 2-step verification process to keep your account secure.
Your account will show you your self-assessment returns and statements. These provide details of the payments you’ve already made, how much you need to pay on your next instalment, and when the payment is due.
If your accountant has completed and filed your return on your behalf, you can also double-check with them if you have any concerns.
Can I reduce the amount I pay on account?
If you know that your earnings are going to be lower in the coming year, meaning you won’t have to pay as much tax, you can ask HMRC to reduce your payments on account. Give us a call on 01664 503 700 to discuss it. You’ll need to include details of how much you think you’ll earn so that HMRC can work out how much you need to pay.
If you apply to reduce your payments but your earnings and tax bill turn out to be higher than you expected, you could end up paying more. If your previous payments on account would have covered your tax bill, but the adjusted ones don’t, HMRC will charge you interest on the difference. Discussing your cash flow, predicted revenue and tax position with your accountant will help you decide on the best course of action.
Whatever stage you’re at with your tax return,we’re here to help. Book a free consultation now.