Payments on Account

 

“I am a freelance journalist and I earn approximately £40k per year. I know I have to make payments on account to HMRC twice a year but I have never really understood how these work, could you explain it in plain English?

 

Payments on account

 

Answer:

Payments on account are a way for HMRC to collect the tax owed in the following stages:

  • 50% by the 31st January that falls within the tax year in question
  • A further 50% by the 31st July after the end of the tax year in question
  • A final balancing payment or repayment to you by the 31st January following the tax year.

These payments only become due when you owe HMRC over £1,000 in tax and more than 90% of the tax you owe is paid via self-assessment.

For example if you are employed and have your salary paid via the PAYE system and you also have a freelance business that makes a small amount of profit in your spare time, then you are likely to fall outside of payments on account.

Payments on account do include Income Tax and Class 4 National Insurance payments but do not include Student Loan repayments so remember to bear this in mind when you are putting money aside.

The first payment on account  can prove most difficult financially as not only do you have the first payment on account to pay you also have the tax owed for the previous tax year.

However if you have been putting some of your self-employed earnings aside as you go along then you shouldn’t encounter a situation where a tax bill takes you by surprise. This is where an accountant that understands your business (like us!) is very useful as they can tell you an estimate of how much money to be putting aside based on your best estimate of business performance for the year ahead.

There are occasions when you can request that HMRC reduce your payments on account, the main reasons for this are:

  • Business profits are reduced
  • You have ceased trading as a business in your current form (ie you are now trading through a limited company)

If, however, this reduction reduces your payments on account to lower than the tax that is actually due HMRC can charge interest on the difference.

It might be worth considering whether a Limited company is more appropriate for your situation.