Payments on account explained
Payments on account are commonly required from Self-Assessment taxpayers, but why do you have to pay them and how are they calculated? Chartered Accountant JOSH RUTHVEN poses the questions and provides the answers.
Why do you need to make payments on account?
Payments on account are expected from Self-Assessment taxpayers unless:
- Your last Self-Assessment tax bill was less than £1,000.
- You paid more than 80% of the previous year's tax you owed through Pay As You Earn (PAYE) or through your tax code.
How many payments do you need to make and when do you pay them?
The payments on account are split into two separate instalments. Each payment will be half of your previous year's tax bill. The payments themselves will be due by midnight on 31 January and 31 July, so you pay your tax every six months.
Example
You become a self-employed individual from 6 April 2023, so the first full year of trading is to 5 April 2024. The total tax liability due from the profits of self-employment is £2,000. As this is the first year of trading, £2,000 will need to be paid as a balancing payment by 31 January 2025.
You will then need to make payments on account of this liability, so you will also need to pay £1,000 by 31 January 2025 and an additional £1,000 on 31 July 2025.
The payments on account will then go towards the 2024/25 tax year and be deducted from that year's liability. For example, if your total liability in 2024/25 is then £3,000, you can deduct the £2,000 already paid via payments on account which will leave a balancing payment of £1,000.
After this, the payments on account will then increase to £1,500 (50% of £3,000) and these will need to be paid by 31 January 2026 and 31 July 2026.
Can payments on account be amended?
If you are expecting your level of income/profit to decrease in the next tax year, you can make an application to reduce your payments on account. Using the example above, the self-employed individual has a liability of £2,000 for the 2023/24 tax year, but if they know their profit will decrease in 2024/25 to create a liability worth £1,000, they can make an application to reduce the payments on account to £500 each.
However, if an individual makes an application to reduce their payments on account, but in fact their profits increase, HMRC will charge interest on the underpaid tax and reserves the right to charge penalties if they believe it was done fraudulently or negligently by the taxpayer.
What is included in payments on account?
Please be aware you will not be required to make payments on account based on capital gains tax or any student loan you owe.
If you have any questions about payments on account, you can talk to us here at Page Kirk by calling 0115 955 5500 or enquiries@pagekirk.co.uk