‘Payments on account’, put simply, are payments made in advance towards the tax which you’ll eventually owe during the year. These will typically affect you if you owe money when you submit your self assessment tax return. If the amount due is more than £1,000, or if less than 80 per cent of the outstanding tax has been deducted at source, it is likely that you will be required to make payments.
When does this occur?
Payments are made by January 31 and July 31 and the amount will be equal to the total tax bill of the previous year, split in half over the two dates. You are notified of these amounts when you complete and submit your self assessment tax return. A calculation is produced by HMRC which provides details of the amount due, when the next payment on account is and when the tax is due to be paid.
Self assessment statement
Your self assessment statement will display the tax that you have paid, and this includes payments on account. The next payment due will also be shown, along with the amount of tax still outstanding.
What you can do to make things easier
It is possible to ask for the payments on account to be lowered. This would only be an option if you believe that your annual income is going to be less than was in the year before.
There are three ways to apply for a reduction: using the online services of HMRC, completing and sending a form SA303, or submitting the claim on the calculation page of your tax return. If your income starts to increase and you think your payments on account may be too low, inform HMRC immediately.
If your income is more than the payments on account, HMRC may charge a penalty if it believes that you have failed to take care. If you have paid less, you will also be charged interest on the amount.
The balancing act
If, once you have completed your payments on account, the total amount of tax due is less than the money paid in the two instalments, you will have to submit a balancing fee, which is the amount outstanding. If you have paid more than the total tax due, HMRC will provide a refund.
Consult a professional before applying to reduce payments on account to ensure you aren’t hit with any penalties or interest.
Article by Karl Bilby, representing The Accountancy Partnership