What are tax payments on account, and do I have to pay them?

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Just when you think you understand your tax return, HMRC throw Payment on Account into the mix.

What is a payment on account?

A payment on account is a payment that you make twice a year towards your tax bill if you're self-employed, on 31st January and 31st July each year, if you had to pay £1,000 or more in tax last year. If you paid less than £1,000 last year, or if you've already paid more than 80% of the tax you owe (e.g. if your tax has already been deducted through your tax code), you won't need to make any payments on account this year.

What do I need to do?

Each payment is half of your tax bill for the previous year, so if your tax bill was £2,000 for the 2016-17 tax year, you'd pay £1,000 on 31st January 2018 and another £1,000 on 31st July 2018 towards your 2017-18 tax bill. This includes payment towards your National insurance Contributions, but not student loan repayments or Capital Gains Tax.

If your 2017-18 tax bill was over 2,000, let's say it was £3,000, you'd need to pay the remaining £1,000 and any student loan repayments or Capital Gains Tax you owe (known as a balancing payment), as well as your first payment on account of £1,500 (half of £3,000) towards your 2018-19 tax bill by 31st January 2019.

If your tax bill was lower than the previous year, and the payments on account mean that you've paid too much, HMRC will refund you.

Why do I have to make a payment on account?

Sounds a wee bit complicated and annoying, right? I won't lie, it is. It took a while for me to get my head around.

The idea is that spreading out tax payments makes it easier for self-employed people like you and I because we don't have to pay a lump sum on 31st January. But it doesn't really work out that way, because you still have to make a large payment on 31st January, your balancing tax payment for the previous tax year and your first payment on account for the current tax year, unless you make less profit.

If you assume that your business makes a higher profit each year (which is generally the aim), then your payment on account and balancing payment due by 31st January will always be quite a large amount, making the payment on account method a bit pointless.

How do I know how much to pay?

When you log into your HMRC account online, you should see the option to view your statements. This will confirm any payments you've made and your next payment amount and deadline.

Summary:

  • A payment on account is a payment towards your next tax bill made twice a year, by midnight on 31st January and 31st July, if you're self-employed.

  • You have to make payments on account unless your last tax bill was less than £1,000 or you have already paid more than 80% of the tax you owe.

  • Payments on account include Income Tax and National Insurance Contributions but not student loan repayments or Capital Gains Tax.

  • Each payment on account is half of your last tax bill.

  • You will need to pay any remaining tax which hasn't been covered by your two payments on account and any student loan repayments and Capital Gains Tax you owe (balancing payment), as well as half of your tax bill as your first payment on account towards your next tax bill by midnight on the tax return deadline date, 31st January.

  • If you overpay your payments on account, HMRC will send you a refund.

  • You can log on to your HMRC account at any time to see how much you owe and when you need to pay.

And that's how payments on account work! I hope this guide has helped you to understand what payments on account are and how they work.


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