Payments on Account: What, When, Why & How
Payments on account are an area that continues to cause confusion for those who are new to the self assessment regime and can often send new clients into a complete panic when they realise that the bill they owe HMRC is 50% bigger than they expected it to be!
WHO DO PAYMENTS ON ACCOUNT APPLY TO?
Payments on account don’t just apply to those who are self employed, it also impacts those with significant other income ie rental income, dividends etc.
WHEN DO PAYMENTS ON ACCOUNT KICK IN?
Payments on account kick in when the income tax payable under self assessment is over £1,000 unless you are already paying 80% + of your tax via PAYE.
HOW ARE THEY CALCULATED?
This is easier to show with an example:
16/17 tax year – tax bill of £3,000 (payment date – 31.01.2018)
HMRC will assume that you will need to pay the same amount of tax next year too and so an additional 50% (£1,500) will need paying on 31.01.2018, this is the first payment on account for the 17/18 tax year.
A second payment on account will be due (£1,500) again at the end of July (31.01.2018 in this example).
This means that you will have paid £3,000 towards your 17/18 tax bill.
When you then do your tax return you will know what your actual tax bill is for 17/18:
· If it was £2,800 then you will have overpaid by £200 and your next years payments on account would be £1,400 at 31.01.2019 less this £200 = £1,200 at 31.01.2019 and £1,400 at 31.07.2019.
· If it was £3,500 then you will have underpaid by £500 and this is paid at 31.01.2019 plus the first payment on account of £1,750 (total payable - £2,250) and then at 31.07.2019 you pay the second payment on account of £1,750.
And so on … !
BUT MY CIRCUMSTANCES HAVE CHANGED ...
If your circumstances change you and know that those levels of payment on account just aren’t right and you will have overpaid your tax you have a couple of options:
· If it’s just a hunch, then pay the January payment on account as per normal but then get your tax return sorted asap after the end of the tax year. This will then confirm what is actually due and you can then reduce the second payment on account accordingly so that you don’t overpay.
· If you know for certain then they will be wrong then you can request for your payments on account to be reduced to be in line with your expectations. But, be warned, if you reduce them down and it was the wrong thing to do you may be charged interest on the late payment.
It does become less painful after the first year – honest!! Just remember to budget for your tax bill and set the cash aside!