PAYMENT ON ACCOUNT: A GUIDE TO WHAT YOU NEED TO KNOW

You completed your self-assessment tax return, filed it on time and made your payment by 31st January, so why are you now being asked to make a second payment called payment on account in July? This blog will give you everything you need to know about what payments on account are when they need to be paid and why. 

WHAT IS PAYMENT ON ACCOUNT?

Payments on account are tax payments made in addition to the main tax payment in January when certain conditions are met. They are not tax payments towards tax from a previous self-assessment tax return but payments in advance towards your following year’s tax return.

Payments on account are applicable if your SATR shows a tax bill of over £1000 in a tax year, except for where over 80% of your tax for the entire year was collected via PAYE.

WHEN ARE PAYMENTS ON ACCOUNT DUE?

Payments on account are due twice a year, and this is where most new self-employed people get caught out by the scheme. The first balance payment is due with your previous year’s tax bill on 31st January, and the following payment is due on 31st July.

HOW ARE PAYMENTS ON ACCOUNT CALCULATED?

Your payment on account will be worked out using your last tax bill from the previous year, as HMRC will assume that your earnings will be greater or stay the same for the following tax year.

For example:

Assuming this is your first year of self-employment and your tax bill was £3,000, you would need to make three tax payments.

  • 31st January – £3,000 – your previous year’s tax bill.
  • 31st January – £1,500 – 50% payment on account
  • 31st July – £1,500 – remaining 50% payment on account.

CAN YOU REDUCE PAYMENTS ON ACCOUNT?

The world of being self-employed is rarely stable, and there could be situations where you cannot make your payments on account or believe your income is changing and the amount might be too high. The good news is you can reduce your payments on account by logging into your online HMRC account and clicking ‘Reduce payments on account’.

You should, however, consider if this is the best approach, more so if it is just a temporary drop in income or cash flow problem, as you will only be prolonging the payment until your next SATR is submitted.

WHAT HAPPENS IF I OVERPAY?

If the two payments on account are greater than your next tax bill, you will get a tax refund from HMRC. You can use form SA303 to reduce your payments on account and request a refund. The positive balance should appear in your Self Assessment account, which you can request to be repaid online or by calling HMRC.

SUMMARY

Payments on account are a relatively simple process so long as you know the basics, and this blog should have outlined them for you. If you still are having issues with them or need to know more, feel free to contact us here at RJF Accounting, where we can offer advice and even deal with your payments on account for you and your self-assessment tax return too!