What are payments on account?
Paying taxes can be a less desirable aspect for the self-employed or alternatively if you receive rental income. Two key aspects to master which are often overlooked are your self-assessment tax return and ‘payments on account’. Payments on account are when HMRC require you to make two individual payments towards your tax bill.
Many business owners are caught out each year by the first payments on account instalment which is July 31, with the final balance to be paid by the deadline of 31 January.
The term ‘payments on account’ refers to advance payment towards your tax liability for that year. The system is used by HMRC to ensure timely payment of taxes owed but can also be an effective way to help spread the cost of your tax bill. Each instalment is calculated at 50% of your tax bill for the previous year.
Who has to make payments on accounts?
If you have a tax bill over £1,000 or have more than 80% income that isn’t taxed at source through PAYE HMRC will request for you to pay an advance instalment otherwise known as ‘payment on account’.
There are two deadlines for payments on accounts, which are as follows:
Midnight January 31st (this is the same deadline as your self-assessment tax return is due)
Midnight July 31st
What are the consequences of missing the July 31 deadline?
If you miss or are late making your payment on account, the penalty after 30 days will be calculated at 5% of the tax due and if it is still not paid after 5 months a further 5% will be added to the overall amount of outstanding tax due. After 6 months another 5% will be added to the charge.
The longer you leave to pay, the penalty will increase, which is why it is best to make payment as soon as possible even if you have missed the deadline to reduce the amount of potential penalty charges.
What happens if I cannot afford to make payments on account?
If you are concerned about paying your tax bill and unsure if you can pay the amount in full, you can set up with HMRC a payment plan known as a ’Time-to-pay’ arrangement. This can be negotiated with HMRC to pay the remainder of your tax bill in instalments.
How can I reduce payments on account?
If your income tax liability changes within the year for instance you have sold a property you used to let, your business profits have fallen or more of your income is now taxed at source through PAYE compared to what they were forecast to be by HMRC based on your last self-assessment tax return from the previous year, you can apply to reduce your tax liability and the amount you are asked to pay on your accounts.
This can be done through either HMRC’s online portal or through your self-assessment form and HMRC can either issue you a refund, once it has been processed or reduce your payment on account.
It is important to remember reducing your payments carries the risk of underpaying your tax bill which can be more expensive in the long run as HMRC will charge interest and possible penalties for underpaid tax.
Alternatively, If your earnings for the tax year exceed what HMRC predicted, based on the previous tax year you may have tax still due after both payments on accounts are made. They will ask you to make a balancing payment to settle the remainder of your tax bill which will need to be paid by January 31st midnight of the tax year it relates to.
What steps can you take to avoid missing the deadline:
1. File Your Tax Return Early:
By filing your self-assessment tax return early, you can get a clearer picture of your actual tax liability and may be able to adjust your payments on account accordingly. This can prevent overpayments and reduce the need for large balancing payments.
2. Pay as Soon as Possible:
Make your payment on account as soon as you can after the deadline to avoid further charges.
3. Set Up a Payment Plan:
If immediate payment isn't feasible, contact HMRC to arrange a payment plan. This can help spread the cost and reduce the financial pressure while minimising additional penalties.
4. Consider Adjusting Payments on Account:
If you believe your income for the current year will be significantly lower than the previous year, you can apply to reduce your payments on account.
Paying taxes may not be the most enjoyable task but understanding and managing your self-assessment tax return and payments on account can make the process smoother. If you need guidance with your self-assessment tax return, it's best to consult a qualified accountant. Additionally, you can contact HMRC directly for support and advice. Taking these steps can help ensure you meet your tax obligations efficiently and avoid unnecessary penalties.