For those who are self-employed, landlords, or others paying tax via Self Assessment, understanding “payments on account” is essential. This system can be confusing for new taxpayers, so let’s break down what it is, why it matters, and how to manage it.
What Are Payments on Account?
Payments on account are advance payments made twice a year towards your annual tax bill. Essentially, HMRC asks for estimated tax payments based on the previous year’s earnings. This helps spread out your tax payments, making it easier to manage your finances.
Who Needs to Pay?
You’ll be required to make payments on account if:
- Your last Self Assessment tax bill was over £1,000.
- Less than 80% of your tax bill was collected through PAYE (Pay As You Earn).
If you meet these criteria, you’ll be automatically enrolled in the payments on account system.
How Are Payments on Account Calculated?
Each payment on account is half of your previous year’s tax bill. For example, if your tax bill for the last tax year was £3,000, you’d make two payments of £1,500 each.
When Do You Need to Pay?
The payment schedule is straightforward:
- First Payment: Due on 31 January (the same day your tax return is due for the previous tax year).
- Second Payment: Due on 31 July.
In addition to these payments, you may have a “balancing payment” due on 31 January after the tax year if your actual tax liability is higher than expected.
Balancing Payments Explained
Since payments on account are based on an estimate, your actual tax bill might be more or less than the amount you’ve paid. After submitting your tax return, HMRC will determine if you owe more than you paid through payments on account. If there’s a shortfall, you must settle this “balancing payment” by the next 31 January.
Requesting a Reduction
If you expect your income for the current tax year to be lower than the previous year, you can apply to reduce your payments on account. This can be done via your online
HMRC account. However, be cautious; underpaying could mean a larger balancing payment and potential interest charges.
What If Your Earnings Are Higher Than Expected?
If your income increases and you end up owing more tax, the balancing payment will cover the difference. HMRC will calculate this when you submit your tax return. It’s essential to plan ahead if you anticipate a higher income, so you’re prepared for any additional payments.
Practical Tips for Managing Payments on Account
- Budget Accordingly: Since these payments are due halfway through the year, plan your cash flow to avoid being caught off-guard.
- Keep Track of Earnings: Regularly reviewing your income can help you gauge if you need to set aside more money for your tax bill.
- Consider Setting Up a Tax Account: Separate your tax savings from your business or personal account to avoid spending money meant for tax.
Summary
Payments on account are designed to help self-employed individuals and others paying through Self Assessment to spread their tax payments throughout the year. Understanding how they work, when they’re due, and how to adjust them is crucial for effective financial planning. For more information, visit the official HMRC payments on account page.
By staying informed, you can manage your tax payments more effectively and avoid unexpected