Payment on account is advance payments towards your tax bill based on your liability in the last tax year. Confused? Don’t worry; most people who encounter them usually are! If you are self-employed, have to complete a Self-Assessment Tax Return or pay less than 80% of your tax at source, then HMRC will advise you that you may be required to make payments on account. In this RJF Accounting blog, we will break down everything you need to know about payments on account so you know how to handle them and are informed of the process.
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What Is Payment on Account?
Payment on account is an advanced payment towards your following tax year’s tax liability based on your previous year’s tax bill. So in basic terms, if your tax liability for the 2023/24 tax year was £1000, HMRC assumes that your tax liability for the 2024/25 tax year will be around the same and will ask for an advanced payment of 50% – £500 to be made as a payment on account.
The payment on account is due in 2 separate amounts, one on the 31st of January and another by the 31st of July each year.
Not everyone will have to make payments on account; they only apply to people with a tax bill of over £1000. You do not need to make advanced payments if your tax liability is under this threshold.
Applying to Reduce Your Payments on Account
There are circumstances in which you can ask HRMC to reduce your payment on account, such as:
- You are already aware that your tax bill the following year is going to be lower
- You are planning to stop being self-employed or planning to retire.
- Closure of your business.
Applying to HMRC for a reduction of your payment on account is a simple process by completing the correct section on your SATR. However, if you reduce your payments on account too far, HMRC will charge you interest and penalties for underpaying your tax if, the following year, the conditions you applied for the reduction did not apply.
What Happens if I’m Late With My Payments on Account?
If you are late making payments on account balance, HMRC could impose interest charges on the outstanding amount. You can ask them for more time to pay the outstanding balance by asking for a “Time To Pay” arrangement, but it is worth keeping in mind that there must be mitigating circumstances for HMRC to grant this arrangement.
Balancing Payments
Finally, the last thing you need to know about payments on account is balancing payments. Balancing payments is the difference between your tax liabilities and your already paid amounts.
For instance, if your total payments on account amounted to £2000, but your tax liabilities were £2200, you would owe HMRC £200. This works both ways; if your tax liabilities were £1800, they would owe you a £200 refund.
How Can RJF Accounting Help?
RJF Accounting has accounting teams based in Manchester and Macclesfield, ready to help you with all your accounting and tax advice needs. We offer in-depth and helpful services and can help you navigate troublesome waters that are tax! We can help with all aspects of your Self Assessment Tax Return, including making sense of payments on account.
If you want to know more about how we can help you speak to the team today about our services. You can call the team on 0161 5040629 or email us at hello@rjf.uk.com to see if we can help you get your plans off the ground! We are open Monday to Friday, 9 am – 5 pm!