What are payments on account?

We explain when you need to make payments on account to HMRC for your self assessment tax return

 

We hope you enjoy this article from our archives. As tax rules change a lot over time, the information in this post may not be current, but we hope you still find it interesting.

 

Payments on account for personal tax returns (self assessment) can be one of the most confusing things to understand when it comes to your income tax bill.

The personal tax year in the UK runs from 6th April to 5th April – for example, the 2019/20 tax year is for the period 6th April 2019 to 5th April 2020.

If you have to file a personal tax return, this needs to be filed with HMRC no later than 31 January after the end of the tax year (assuming an online tax return).

This is also the date when the balance of tax owed for the tax year is due.

If you are not affected by payments on account this means that the normal tax payment timeline looks like this:

 

 

So far, so simple!

However, HMRC under some circumstances will ask you to make tax payments ahead of this timeline, they call these payments on account (often abbreviated to POA).

Before we get into the details of how payments on account work, we have some simple advice that will help ensure that you should not be in a position where you can’t afford to make your payments on account.

 

Tax pot

We recommend that you have a separate personal bank account that is specifically for putting aside your income tax.

If you’re self employed or if you trade through a limited company and have income tax to pay on your salary / dividends then we would recommend that every month you set aside an amount of money to cover your personal tax for that month’s income.

For example, if you know roughly how much you will be earning, work out the annual tax due on that and put aside 1/12 of it every month. You can adjust this as the months go along if your income ends up being lower or higher than anticipated, so by the end of the tax year you should have put the correct total amount aside.

Or perhaps you have a one-off item of income that you know you’ll be paying tax on further down the line, set aside the tax in the month you earn the income.

This means you should always be ahead of the tax payments deadlines and shouldn’t be caught by surprise.

 

Payments on account explained

So what exactly are payments on account?

You will have to make two payments on account each year, unless you meet either of the below criteria:

• If your last tax return tax bill was lower than £1,000; or
• If you have already paid more than 80% of your total personal tax calculation, for example if you are in employment (PAYE) then your employer will be deducting tax through your salary and tax code

For example, if you are both employed and self employed and your total tax calculation for the year is £15,000 and you have already paid £13,000 of this through your employment, you won’t be drawn into payments on account as you will have already paid more than 80% of your tax owed through your employment.

However, if the majority of your income is not taxed at source then you are likely to be drawn into the payments on account system.

If most of your income comes from self employment or from dividends from your limited company then you will likely need to make payments on account.

With regards to how much your payments on account are – it will be based on your previous years tax bill, with two payments due of 50% of this each – one by 31 January during the tax year and the second one by 31 July after the tax year.

These two payments on account are then taken into account when your final tax payment is due by the following 31 January – this may mean a bit more tax is due for the balance at that point, or if you have paid too much on account already a refund will be factored in.

Below is a timeline explanation of how payments on account work – similar to the earlier diagram but this time including payments on account – if you find the image too small to read you can click on it and it should open up larger.

In this example we assume that tax year 1 is the first year that the tax payer has to file a tax return, therefore there are no payments on account for the first year.

 

 

Applying to reduce your payments on account

By default each payment on account instalment will be calculated as 50% of the previous years tax bill – however if you believe that your tax bill will be lower, you can apply to HMRC to reduce your payments on account – for more information on this see the HMRC link below:

https://www.gov.uk/understand-self-assessment-bill/payments-on-account

 

Be aware that if you apply to reduce your payments on account and subsequently it turns out that the tax was higher than expected and therefore the payments on account should not have been reduced, HMRC will re-instate the payments that should have been paid and also charge you interest on these underpayments, so we would recommend only to reduce your payments on account if you have a good degree of certainty on your tax position.

Also payments on account do not include anything you owe for capital gains tax or student loan repayments – these will get included in the final years balancing payment.