What is Payment on Account for Self-Assessment?
Payments on account' are advance payments paid twice a year towards your UK Self-Assessment tax bill. In this article we will help you understand how it all works, criteria and what to expect so you can make tax payments with confidence and ease.
Every year when the deadline for submitting self-assessment tax return approaches on 31st January many business owners are faced with the issue of payment on account. And many are confused as to why they should be asked to pay tax earlier than when actually incurred or after, unlike other taxes they are familiar with namely, value added tax (VAT) or Corporation tax (CT).
So, to help understand how it all works and what to expect we have addressed some common questions.
What is payment on account?
Why do you have to pay it?
Does everyone have to pay it?
What happens if your tax bill is more/less than what was originally calculated?
How often should it be paid?
Can you do anything to lower the amount paid.
How to pay your Payment on Account
What is payment on account?
Based on the figures submitted in your previous year’s tax return, HMRC calculates what is likely to be your tax bill.
Why do you have to pay it?
HMRC have this in place so that business owners know how much to pay and are helped with cash flow without having to pay a huge tax bill all at once.
Does everyone have to pay it?
Not everyone who completes a Self-Assessment tax return will have to make a Payment on Account.
You are required to do so if you meet the following criteria:
If the calculations based on your previous tax return works out to be less than £1,000 you are not expected to pay towards payment on account as you are then considered to fall below the threshold.
Your taxable profits exceed £13,500.
80% of your total tax bill is NOT collected at source. For example, through PAYE (Pay As You Earn) via your employer’s payroll or payments from a pension scheme.
What happens if your tax bill is more/less than what was originally calculated?
No two years are the same and there is a very high chance that your expenses and income will be very different to the previous years’ figures. If the calculations based on your previous year’s numbers were not enough to cover your tax bill for the current year, you pay a ‘balancing payment’. If, however, the calculations meant that you had paid more, then the excess will be refunded to you by HMRC.
How often should you pay?
These are paid in 2 instalments every year, one while submitting your self-assessment return by 31st January and the other by 31st July. So, by 31st January you would pay the tax bill and 50% of the tax bill as payment on account.
Can you do anything to lower the amount paid.
If you are sure that your income in the current year is likely to be less than your previous year, you could contact HMRC and request reducing your payment on account. A word of caution though. If subsequently, your income is higher than anticipated, resulting in underpayment of payment on account, HMRC will charge you interest on the balance outstanding.
How to pay your Payment on Account
You can make Payments on Account:
Through your online bank account
Online or telephone banking (Faster Payments)
CHAPS
By debit or corporate credit card online
At your bank or building society.
If you are paying via bank transfer it is important to remember that you will need your Unique Taxpayer Reference (UTR) to hand.
If you are struggling to pay your tax, you may wish to set up a Time to Pay arrangement with HMRC.
To learn more about making Payments on Account, you can find a detailed guide on the HMRC website or by talking to us.
If you would like specific tax advice in relation to this topic, feel free to get in touch with our Tax experts at Dragon Argent by Scheduling a discovery call by clicking the link below.
Book a call with our Accountant today ↓
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