If you’ve completed a self-assessment tax return, or if you’re due to, you’ll probably have come across the term ‘payments on account’. But what are they exactly? And will you be required to pay them?
What Are Payments on Account?
Payments on account are tax payments made in advance towards next year’s tax bill. This amount is based on your current year’s tax bill.
The overall principle is based on the presumption that you will owe the same amount of tax in the coming financial year as you did in the last.
This total is split into two and paid in two instalments for next year’s tax bill.
For example, if your 2010-11 tax bill was £4,000, it is assumed your 2011-12 tax bill will be this amount too. You would therefore be required to make two payments of £2,000 during 2012 to cover the amount due in January 2013.
Does Everybody Have to Pay Them?
No, not everybody is required to make payments on account. The requirement to do so is based on how much you earned in the most recent financial year and how much of the tax due has already been collected at source. More precisely, payments on account will be applicable to you if:
-you send a tax return and the tax due is over £1,000
-if 80% or less was collected at source (for example, through your tax code)
How Will I Know How Much My Payments on Account Are?
Payments on account are calculated based on your previous year’s tax bill, with each amount equating to half the total due.
However, you do not need to work this out for yourself as HM Revenue and Customs (HMRC) will advise you of these when you file your return online; or will send it to you by post if you submit a paper return.
If you’d prefer us to file your return for you though, we’ll be able to advise you of your payments on account instead.
When Do My Payments on Account Need to be Paid?
The first instalment is due by the 31January and the second instalment is due by the 31July.
If you decide to use our services for your return, we’ll remind you nearer the time of each of these being due.
What If I Didn’t Pay Enough Through my Payments on Account to Cover Next Year’s Tax Bill?
Any tax due after you’ve paid your payments on account is called a ‘balancing payment’ and will need to be paid by midnight 31 January after the end of the tax year.
So, for example, any additional tax due for the 2011-2012 tax year will be due by midnight 31 January 2013.
What If I Overpaid Through my Payments on Account?
If the amount you paid through your payments on account are higher than your tax bill and you’re lucky enough to be owed money by the Revenue, you will be refunded the difference.
What If My Earnings will be Lower This Year?
If you know that your business profits are going to be down this year, you can ask HMRC to reduce your payments on account. You can do this in one of two ways:
-by logging in to your HMRC online account
-by sending an SA303 form to your local tax office
Payments on Account: An Example
For clarity, let’s look at an example:
Susan began trading on 6 April 2011 and has a tax bill of £3,000 for the 2011-12 tax year.
So, on the 31 January 2013, she will be required to pay £3,000.
However, she will also have to pay her first payment on account in respect of 2012-13. This will be calculated at 50% of her 2011-12 tax bill, and so will be £1,500.
Therefore, the total due by 31 January 2013 will be £4,500.
Her second payment on account for 2012-13 will then be due by 31 July 2013 and will be another £1,500.
Then, when she files her return for the following financial year, she’ll have already paid £3,000 towards it. If she’s overpaid, she’ll be refunded the difference or if she’s underpaid, then the balancing payment will be due by 31 January 2014 and her payment on account will be increased.
For example; if her tax bill for 2012-13 comes out as £3,600, she will need to pay the balancing payment amount of £600 by 31 January 2014. On top of this, she will need to pay 50% payment on account for that tax year, which would be 50% of £3,600; totalling £1,800.
So, the total Susan will need to pay by 31 January 2014 would be £2,400 (£600 balancing payment + £1,800 first payment on account instalment).
Assuming nothing had changed, she’d simply be required to make the two payments on account instalments in January and July 2014.