What is payment on account?
Payment on account is a method of paying your tax bill operated by HMRC. The Payment on Account are tax payments made twice a year to spread the cost of the up and coming year’s tax.
These Payments on Account are calculated on the previous years tax liability and split 50% due on 31st January and 50% on 31st July. It is calculated based on the previous year’s tax bill because HMRC assume you will have earned the same level of profits as you did in the prior year.
Once your tax liability has been calculated the 2 payments on account will be deducted from the total liability due in the year they relate to, leaving either a refund or balancing payment.
For example:
Your first tax return for the year ended 5th April 2020 shows a tax liability of £10,000, this means you are required to pay the 19/20 tax liability of £10,000 and 1st payment on account toward the next years tax bill of £5,000 both due on 31st January 2021. The second Payment on Account of £5,000 is due on 31 July 2021.
For year ended 5th April 2021 your tax liability is now £11,000, you have already made 2 payments on account towards this year of £5,000 each and therefore you now owe £1,000 as the remaining balance. Payment on account are also due of £6,000 (50% of the £11,000 tax bill) so you now pay £7,000 due on 31st January 2022 and £6,000 due on 31st July 2022.
Newly self-employed people can find this difficult in the first year because not only do they have to pay the tax bill relating to last year’s income they are also expected to pay 50% of the liability again toward to next year’s tax bill.
Who is required to pay their tax bill by payment on account?
If your self-assessment tax bill is more than £1,000 then you are required to pay by payment on account.
Are there any exceptions?
If you have already paid more than 80% of your tax bill through a PAYE scheme due to a mixing self-employment and employment.
What happens if I do not pay the Payment on Account?
HMRC will calculate interest from when the payment was due to the date the tax liability is paid.
What happens if my business tax bill varies year to year?
If you know your tax liability is going to be much less than the year before you can contact HMRC or your accountant to request a reduction to your payments on account.
Is there any support if my business has been affected by Coronavirus?
There is a ‘Time to Pay’ scheme and we would strongly recommend contacting HMRC and talking to them if you are struggling to pay your tax liability and they will work with you to find a way forward. https://www.gov.uk/difficulties-paying-hmrc
What are the benefits of payment on account?
You can spread the cost of your tax bill rather than having to pay all in one payment. Also, if you file your self-assessment tax return early you may be entitled to some money back if your tax bill for the year is lower.
Our top tips for payment on account
Keep your business finances up to date on a weekly/monthly basis and know your numbers. This way you will know exactly what your income, expenditure, profits and liabilities are and you can avoid any surprises.
Put some money aside on a monthly basis to cover any tax due and save as you go.
Have your accounts and tax return completed in sufficient time so you/ or your advisor have sufficient time to assess your circumstances and provide tax planning.
Need further advice?
If you need advice and would like the opportunity to discuss your own personal tax obligations, get in touch we would be happy to help. 01788 815017 accounts@cubeaccounting.co.uk
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