PAYMENTS ON ACCOUNT

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What are payments on account?

If you’re a UK taxpayer who pays less than 80% of your income tax at source and your tax bill is over £1,000, you may well be told by HMRC to make “payments on account“. This guide explains what payments on account are, when you need to pay them, and what to expect when making payments on account for the first time.

They’re calculated based on your previous year’s tax bill. In other words, HMRC is making a prediction about your future income based on your past income. They’re due in two instalments – the deadlines are 31 January and 31 July.

This means the first instalment is due on the same day you submit your Self Assessment tax return and clear your bill for the previous year, so it’s important you have enough money set aside.

HMRC has designed payment on account to help the self-employed stay on top of their payments – and so that they don’t benefit too much from paying tax in arrears.

 

Whereas employed people are taxed at source through PAYE, the self-employed don’t pay their tax bill until the January after the end of the previous tax year.

 

But payment on account ends up catching many newly self-employed people out. It’s easy to see why – after the annual rush to complete a Self Assessment, it’s not fun to be presented with a bill that’s a lot higher than you’re expecting.

 

And while in theory payment on account helps the self-employed spread out their tax bill, it can lead to more financial hardship for those who’re already having difficulty paying.

Making payments on account

Payments on account are due on 31st January during the tax year, and 31st July soon after its end. For example, on 31st January 2021 and 31st July 2021 you may be told to make payments on account towards the tax that you’re going to have to pay on your income for the 2020/21 tax year, even though the tax return for that year is not due until 31st January 2022.

If you end up paying too much HMRC will give you the difference back, either via cheque or bank transfer or by deducting the difference from your next tax bill.

Here’s a payment on account example

Each of the two payments on account will normally be 50 per cent of your previous tax bill. Gov.uk uses this example calculation:

 

Your bill for the 2019 to 2020 tax year is £3,000. You made two payments on account last year of £900 each (£1,800 in total).

 

The total tax to pay by midnight on 31 January 2021 is £2,700. This includes:

  • your ‘balancing payment’ of £1,200 for the 2019 to 2020 tax year (£3,000 minus £1,800)

  • the first payment on account of £1,500 (half your 2019 to 2020 tax bill) towards your 2020 to 2021 tax bill

  • you have to pay your second payment on account of £1,500 by midnight on 31 July 2021

 

If your tax bill for the 2020 to 2021 tax year is more than £3,000 (the total of your two payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2022.

 

Payments on account include Class 4 National Insurance Contributions where applicable, but not student loan repayments or Capital Gains Tax.

 

You won’t need to make a payment on account if:

  • your tax bill for the previous year was less than £1,000 after PAYE

  • 80 per cent or more of your tax was deducted at source through PAYE

Can you reduce payments on account?

Being self-employed, your income can fluctuate from year to year. If you think that your income for the next tax year will be lower than the previous tax year, you can apply to have your payment on account reduced. We can do this for you on the tax return.

In practice, many people choose to do this if they’re having trouble paying their tax bill. Some reduce their payment on account, presuming they’ll be in better financial shape later and that they’ll find it easier to settle the remainder of their bill.

 

But you should think carefully about this – if your income is the same or higher in the next tax year, you’ll still have to pay the same amount, meaning you’ve only delayed the burden.

 

And if you reduce your payment on account and it then turns out you’ve underpaid, you’ll have to pay interest on the outstanding amount. This can significantly increase your tax bill.

 

On the other hand, if you overpay, HMRC will refund you.

Reducing payment on account in 2021

To help support Self Assessment taxpayers who are struggling to pay because of coronavirus, the government has announced that you can defer your tax payment due on 31 January 2021 by up to 12 months.

The government previously let you defer the payment on account due on 31 July 2020 to 31 January 2021, so this means you’ll be able to defer your:

  • second 2019-20 payment on account (due on 31 July 2020)

  • balancing payment for tax year 2019-20

  • first payment on account for 2020-21

If you owe up to £30,000 you can use HMRC’s Time to Pay online service to apply for an extension, without having to call HMRC.

 

But as interest will be added to the balance from 1 February, if you can make your payment, you should.

Check your payments on account

If you’re looking for a payment on account calculator, you can actually check your payments on account during the year by signing in to your personal tax account using your Government Gateway ID and selecting the option to view your latest Self Assessment return.

 

Click ‘View statements’ and you’ll see any payments on account you’ve already made, alongside payments you need to make towards your next tax bill.

As ever with tax, if you’re unsure, you should get in touch with us or HMRC directly for guidance.

And if you’re having trouble paying, don’t ignore the situation. It’s important that you get in touch with HMRC – you might be able to use Time to Pay to set up a payment arrangement.