If you complete a tax return you may have to pay your tax twice a year. This sounds like it should be bad, but it can be a helpful way of spreading your payments throughout the year.
What are payments on account?
Payments on account are made twice a year and are payments that you make towards your next tax bill. It is a way of bringing the tax collection closer in line with those who pay their tax monthly through PAYE.
Who has to pay?
If the tax liability on your last submitted tax return was over £1000 then you will automatically be set up for payments on account.
When do I have to pay?
You pay twice a year with payment deadlines on January 31st and July 31st however you can pay before these deadlines.
How is it calculated?
HMRC will use your previous tax bill to estimate how much tax it thinks you will be paying next year. It will then half this amount and charge you this in January and July, so in the following January you only have to pay what is left over, if any, and potentially the next payment on account. If you have overpaid, you will receive a refund, or if completing your tax return close to the deadline it will be deducted from the next payment on account.
Can you reduce how much you pay?
If you think your taxable income will reduce for the following year you are able to apply to reduce your payments on account. They can be reduced through your tax return or via an HMRC online account by either your agent or yourself. Payments on account cannot be reduced by too much as if your tax liability is higher than the reduced amounts when your actual tax return for the year is complete HMRC will charge interest for the underpayments and potentially penalties.
If you have collated your information for the year prior to the July second payment on account deadline the filing of the actual tax return can replace the estimated tax due if the tax liability for the year is lower than the prior year.
New to self assessment? – watch out
If you are new to self assessment or have never paid payments on account before it’s worth putting money aside throughout the year so that you don’t get caught out. This is because the first time you become part of the payment on account regime you could have to pay 150% of the tax liability in January. This would be 100% of the tax from the prior tax return and 50% again for the following tax return. This first experience can feel like a shock, but it will make the next payment in the following January easier. This is because you would have already paid 100% of the prior year’s tax to deduct from the total.
How to pay
Simply log in to your government gateway and follow the instructions. Alternatively you can pay by phone, bank transfer or a number of other different way. The details of this will be on the letter you receive from HMRC, or on the HMRC payment guidance online.
We hope this helps clear up some of the questions regarding payments on account. Your government gateway account will always show your upcoming payments so we really do recommend setting one up. If you have any other questions regarding payments on account just give us a call and we will be happy to help.