Payments on Account
What are payment on account in tax and on your self-assessment tax return.
Payments on account’ are advance payments towards your tax bill (including Class 4 National Insurance if you’re self-employed).
You have to make 2 payments on account every year unless:
- your last Self-Assessment tax bill was less than £1,000.
- you paid more than 80% of the previous year’s tax you owed, for example through your tax code or because your bank had already deducted interest on your savings
Each payment is half your previous year’s tax bill. Payments are usually due by midnight on 31 January and 31 July each year.
Cancelling your Payments on Account
If you know your tax bill is going to be lower than last year, you can ask HM Revenue and Customs (HMRC) to reduce your payments on account and this can be done by either including this on your tax return or by logging into to your HMRC account or the HMRC app and either reduce these down or cancel them all together.
Overpaid Tax or Underpaid Tax
If you don’t reduce your payment on account and you overpay your tax HM Revenue & Customs will refund this to you.
If you do reduce your payments on account and you have still overpaid your tax, then HM Revenue & Customs will refund this to you.
If you do reduce your payments on account or even cancel them and you do owe the tax, then HM Revenue & Customs will charge you interest. Please be aware that if you cancel these down to nothing the interest will be based on the whole amount of the payment on account.
If you reduce the payment on account down but still, make a payment on account then the interest they will charge will just be the difference to wat was due and what was paid.
The interest that HM Revenue & Customs charge will depend on the interest rates at the time so they could differ from year to year.
Capital Gains Tax and Student Loan
Capital gains tax and student loan repayments are excluded in the calculation of payments on account.
If you owe any capital gains or student loan, then they are included in the tax for the year and excluded form the payments on account.
Knowing How Much to Reduce Then Down By
To review your payment on account and how much you need to reduce them by:
First look at your income for the following year and if this is down and you are employed then you will get an indication form your annual salary but do include and commissions and bonus in the calculation.
If you are self-employed then you need to look at your results year to date in the following tax year as this will give you an indication of how the year is going and if you need to do this and by how much.
If you use cloud software like Kashflow, FreeAgent, Xero then you can run a report on this and review this at the halfway point of thorough the current tax year as an early indication on how much to reduce them down by or leave them as they were.
If you do reduce your payment on account down and it turns out, you should not have reduced them make the payment to HM Revenue & Customs immediately so when preparing your tax return the payment was already made to them.
If you do not make that payment, then the tax that you must pay for that year will be much higher as the payments on account will be based on 50% of the tax owed for that year.
If you need to discuss this then please reach out to us.
Call 07795 425032