It’s always a bit of shock the first time you submit a self assessment tax return and realise that you have to pay your tax in a lump sum rather than having it deducted from your wages monthly.
It’s a double shock when you realise that you need to make payments on account towards next year’s tax bill as well. This generally means that your first payment to HMRC as a self employed person is generally 50% higher than you think it would be.
What is Payment on Account?
Payment on Account is a tax payment made twice a year by self employed people in order to spread the cost of the year’s tax bill. It is calculated by looking at your previous year’s tax bill and is due in two instalments.
The first instalment is due on 31st January (the same day as your balancing payment for the previous year) and the second instalment is due on 31st July. It is intended to help you spread your payments out during the year – and of course gives the Exchequer a financial boost in the middle of the year.
Each of the two instalments of the Payment on Account will normally be 50% of your previous year’s tax bill.
There are some circumstances in which a Payment on Account will not be due. If your tax bill for the previous year was less than £1,000 then you are not required to make any Payments on Account. Also, if 80% or more of your tax was deducted at source on your previous year’s tax bill, you don’t have to make any Payments on Account.
Payments on account don’t include anything you owe for capital gains tax or student loans (if you’re self employed) – these must be paid with your balancing payment.
How does this work?
We’ve given you a simplified example of how this could look in your first and second year:
2015/16 Tax Year:
Tax due for 2015/16 tax year
Plus First Payment on Account for 2016/17 (50% of tax due for 2015/16)
Total Payment Due on 31st January 2017:
Second Payment on Account for 2016/17 (50% of tax due for 2016/17)Payment Due on 31st July 2017:
2016/17 Tax Year:
Tax due for 2016/17 tax year: (also known as balancing payment)
Less First payment on account paid 31/01/17:
Less Second payment on account paid 31/07/17:
Plus First Payment on Account for 2017/18 (50% of tax due for 2016/17)
Total Payment Due on 31st January 2018:
Second Payment on Account for 2017/18 (50% of tax due for 2016/17)Payment Due on 31st July 2018:
If you submit your tax return before the second payment on account is due on 31st July then HMRC many send you a revised statement of account which is adjusted so that you’re not over or underpaying tax.
Can I reduce my Payments on Account?
Self employed peoples’ income can fluctuate from year to year. If you think that your income for the next tax year will be lower than in the previous tax year, you can apply to have your Payments on Account reduced.
You can do this by either logging into your Personal Tax account and clicking ‘Reduce payments on account’ or you can complete form SA303 and send it to HMRC.
If you choose to reduce your Payments on Account and your income is the same or higher the next year then you still have to pay the same amount of tax and you’re just deferring the problem.
If you have overpaid tax HMRC will refund it to you. However, if you end up underpaying tax by reducing your Payments on Account then HMRC will charge you interest on the underpaid amount which could significantly increase your tax bill.
Remember if you’re signed up to our monthly dot-to-dot service (which includes unlimited support), we will help you with any queries about your self assessment statement or payments which are due.