What are payments on account for self assessment?
Payments on account are payments towards your income tax bill made during the year. There are two payments on account each year, and the intention is to spread your income tax liability equally between these two payments. It stops you from becoming indebted to HMRC and helps to (slightly) smooth the cash flow impact of payments.
Payments on account apply to UK taxpayers submitting a self-assessment tax return where less than 80% of their income is taxed at source. So, for those in full time employment with earnings subject to PAYE you may not have to make payments on account if the tax deducted at source is more than 80% of your total tax liability.
Payments on account are also only relevant where your tax bill is more than £1,000 so again if your final tax liability is small, you are unlikely to fall within the payments on account regime.
How is a payment on account calculated?
The idea behind payments on account is to spread your total tax bill across two equal payments. But as one of the payments is due before the end of the tax year how is the payment calculated?
Well, it’s based on your previous years tax liability. So, as an example, if your total liability for tax year 2019/20 was £20,000 then your payments on account for tax year 2020/21 will be £10,000 each.
When are payments on account due?
Payments on account are due on the 31 January and 31 July each year. The 31 January payment is made before the end of the tax year and the 31 July payment shortly after the end of the tax year.
So, continuing the above example, for tax year 2020/21 your payments on account would be due on 31 January 2021 and 31 July 2021.
What if my final tax liability is different to what I have paid?
The eagle eyed amongst you will have already spotted a problem. In a lot of cases, you will have paid your payments on account before you know your final tax liability for the year. Meaning, when you come to prepare your self-assessment tax return you may have paid too much or too little.
Following our example, by the 31 July 2021 you have in theory paid your full tax liability for tax year 2020/21. However, the tax return is not due to be submitted until 31 January 2022 and so we may not know the final tax liability yet.
What if the final tax liability was £35,000? Well, in this case, you will have an additional payment to make of £15,000. This additional payment is known as a balancing payment. It’s due on 31 January 2022, the same date as the first payment on account for the next tax year.
What if the final tax liability was in fact only £12,000? Well, lucky you! You’ve overpaid by £8,000 and this amount will be repaid to you by HMRC. You should ensure you add your bank details when completing your self-assessment tax return as that does speed up repayments.
Do I have to pay a payment on account?
Put simply, yes.
Unless 80% or more of your income is taxed at source or your final tax liability last year was less than £1,000 you will fall within the payments on account regime.
If that’s the case, then you are required to make a payment on 31 January and 31 July. If you do not, then you will be charged interest on any outstanding amount and may also be charged penalties.
However, there are times where you can legitimately make a claim to reduce payments on account without being subject to interest and penalties, which we explore below.
When can I reduce payments on account?
It is possible to legitimately reduce your payments on account where you expect your tax liability this year to be lower than last year. There could be lots of reasons for that including:
- Your business has been less profitable/ceased
- You have earnt more income which has been taxed at source, perhaps through PAYE
- You are eligible for more tax deductions this year which you expect to reduce your liability
In 2021, this is more relevant than ever as some businesses saw a reduction in trading and profits as a result of COVID.
If that’s relevant, then you can make a claim to reduce your payments on account. The best way to do this is through your Personal Tax Account. Claims to reduce payment on account are usually processed within 48 hours.
A word of warning – don’t reduce payments on account too much
If you do reduce your payments on account then be warned that if you end up underpaying your tax as a result, HMRC will charge interest and may also charge penalties if you did not take reasonable care. It’s therefore crucial that any reduction to your payments on account is accurate and closely aligns with what you expect your final tax liability to be.
If you’re unsure about how to calculate that, then get in touch with us, we’d be happy to give you a steer.
Wrapping up
When it comes to payments on account for self-assessment that’s just about everything you need to know. If you’ve got any questions on anything here then we’d love to hear from you.
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