Self Assessment Payments on Account – Explained!

calendar_January_31With the tax return filing deadline fast approaching at the end of this month, I thought it would be a good time to explain the whole system of payments on account, which invariably “fox” our clients and which we spend significant time explaining each year.

Payments on account are a way of spreading the cost of your tax bill over 2 instalments—31st January and 31st July.  If your total tax bill is less than £1k, OR if more than 80% of your tax bill is deducted at source, you don’t have to make payments on account.  Otherwise you are required to pay some of your next year’s tax bill in advance, in 2 instalments, each of them 50% of your previous year’s tax bill.

Here is an example…

For the 13-14 tax year a self-employed person has a total tax bill of £10k.  This is payable by 31st January 2015.

At the same time, HMRC are looking for a down payment on the likely tax bill for 14-15 (which you’re already 10 months through).  Therefore a 1st installment of 50% of the prior year’s tax bill (i.e. £5k) also becomes due on 31st January 2015, making the total payable £15k.  The 2nd installment for 14-15 of £5k is due for payment on 31st July 2015.

Of course, the actual tax bill for 14-15 is only known once your tax return for that year has been prepared, and any differences between actual tax owed, and payments on account made, results in a balancing payment (or refund) in January 2016.

The main problem comes in either the first year of trading (when effectively you are asked to make a tax payment covering 18 months all in one go) or when you experience a sudden jump in profits meaning that payments on account already made fall significantly short of your actual tax bill due.  This is one reason why we urge all clients to have their tax returns prepared nice and early, so that unexpectedly large tax bills are not suddenly sprung upon you with very little time to budget for them.

As income can fluctuate from year-to-year, it is possible to apply to reduce your payments on account if  your income for the next tax year will be less.  However, this is not a mechanism to just delay payment; if you under-call your payments on account, interest and surcharges will be levied.

For further information, or if you are struggling to pay your tax bill on time, please contact us for advice as to your own situation.  DO NOT bury your head in the sand – it really won’t go away!