Payments on account can be misunderstood, especially if you are newly self-employed. In simple terms, they help spread the cost of your annual tax bill.
People who submit self-assessment tax returns must make these payments twice a year.
In around six weeks (on 31 July), your next payment needs to be made, although this year you can defer it due to the coronavirus pandemic.
If the Covid-19 has left you with financial problems, you may defer the payment up until 31 January 2021. You can pay it at any time between now and 31 January 2021 without having to tell HMRC you are deferring.
We would recommend that if you can afford to you should pay as normal by 31 July.
What are payments on account?
Payments on account is a way for self-employed people to pay their tax bill. The amount is calculated by using last year’s tax bill.
To spread the cost you pay in two instalments. The first is made on 31 January and at the same time you make a ‘balancing payment’, clearing your tax bill for the previous year. The second instalment is due on 31 July.
You are given the sum you need to pay at the same time as you receive details of your January payment. This is calculated by HMRC using the details you present on your self-assessment tax return.
How does it work?
Each payment on account is usually 50% of your previous tax bill. The government’s website gov.uk uses this example:
Your bill for the 2018 to 2019 tax year is £3,000. You made 2 payments on account last year of £900 each (£1,800 in total).
The total tax to pay by midnight on 31 January 2020 is £2,700. This includes:
- your ‘balancing payment’ of £1,200 for the 2018 to 2019 tax year (£3,000 minus £1,800)
- the first payment on account of £1,500 (half your 2018 to 2019 tax bill) towards your 2019 to 2020 tax bill
You then make a second payment on account of £1,500 on 31 July 2020.
If your tax bill for the 2019 to 2020 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 2021.
Your payments on account include Class 4 National Insurance Contributions which, until a few years ago, were paid separately.
How to pay
Those completing self-assessment tax returns online have the opportunity to make their payment on account at the same time as their balancing payment for the previous tax year.
If your accountant completes your tax return they advise you of how much you need to pay. You can pay in a variety of ways and the government website explains how.
Reducing payments on account
The income of self-employed people changes each year. So if there is a tax year where you think your earnings will be lower than the previous one, you may apply to reduce your payment on account.
You can do this by logging into your HMRC account or sending a form SA303 to the tax office. You can always ask your accountant if you are unsure.
Think carefully before doing this because if it turns out that your income was the same or higher than the previous year you will likely have underpaid so will have a higher tax payment the following year.
Check your situation
We’re always happy to update our clients about their current situation. If, however, you want to check your own situation you can log into the Government Gateway to check your payments on account.
Once you have logged in (you can also register on the website) select the option to view your latest self-assessment tax return.
Then, click on ‘view statements’ and this will give you all the details you need. This includes payments you’ve already made and if you need to make others towards your next bill.
If payments on account worry you, why not contact us today for a no-obligation chat about self-assessment?