02 Jan Payment on account
Your Self-assessment bill includes a payment on account?…..’What is it?’…..’Do I Have to pay it?…..’When do I have to pay it?’…..’How do I pay it?’
What is payment on account?
‘Payments on account’ are advance payments towards your tax bill, made twice a year by Self-Assessment taxpayers to spread the cost of the upcoming year’s tax. Payments on account are payable when your tax bill is over £1,000.
Each payment is half your previous year’s tax bill (Tax and Class 4 NI). HMRC is making a prediction about your future income based on your past income.
Payments are due by 31 January and 31 July.
This means the first payment is due on the same day as your previous years tax is due, so it’s important you have enough money set aside, especially if you are doing your return close to the deadline.
The first year you enter into payment on account you effectively pay 150% of your tax bill, which catches a lot of newly self-employed people out with a bill that’s a lot higher than expected.
Employed people are taxed at source through PAYE, HMRC has designed payment on account to help the self-employed stay on top of their payments.
If after making the 2 payments on account you still have tax to pay you have to make a ‘balancing payment’ by 31 January.
Example
Your bill for 2020/2021 is £3,000. You made 2 payments on account last year of £900 each (£1,800 in total).
The total tax to pay by 31 January 2022 is £2,700. This includes:
- your ‘balancing payment’ of £1,200 for 2020/2021 (£3,000 minus £1,800)
- the first payment on account of £1,500 (half of 2020/2021 bill) towards your 2021/2022 tax bill
You then make a second payment on account of £1,500 on 31 July 2022.
If your tax bill for the 2021 to 2022 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2023.
Do I have to make a payment on account?
You have to make 2 payments on account every year unless:
- your last Self Assessment tax bill was less than £1,000 (You can drop out of payments on account and then re-enter in following years)
- you’ve already paid more than 80% of all the tax you owe, for example through your tax code if you also have an employment
How do I pay my payment on account?
The easiest ways to pay your payment on account are:
- Via your online self-assessment account
- By Bacs using your Unique Taxpayer Reference (UTR) number followed by the letter ‘K’.
Can I reduce my payment on account?
You can reduce your payments on account via your tax return by simply reducing the amount and providing reasoning for the reduction.
If you have already submitted your return, You can log into your online HMRC account and clicking ‘Reduce payments on account’. Or, you can send form SA303 to your tax office.
If you reduce your payment on account and it then turns out you’ve underpaid, you’ll have to pay interest on the underpaid amount. Interest is calculated based on the number of days late the underpayment is.
If you are unsure about if your income is lower than the previous year, it may be wise to pay the payment on account in January and then complete your next tax return before the July payment on account is due. The July payment can then be amended or even cancelled.
If you are looking to reduce the payment on account simply because you can’t afford to pay it, get in touch with HMRC to discuss the time to pay service. They are more accommodating than most people think if you tell them you can’t pay rather than just not paying.
What if I end up overpaying?
If you overpay, HMRC will send you a refund.
You can do your tax return any time after 05th April. The earlier you do it the quicker you get your refund.
If you’d like to discuss your payments on account, please get in touch.