Payments on account are advance payments towards your tax bill in the UK’s self-assessment system, primarily for self-employed individuals, freelancers, and others with non-PAYE income.
Here’s a detailed explanation:
What Are Payments on Account?
- Purpose:
- These are designed to help spread the cost of your tax bill over the year, rather than paying a large lump sum all at once.
- Who Pays:
- Generally, you make payments on account if your last Self Assessment tax bill was more than £1,000, unless more than 80% of your income is taxed at source (e.g., through PAYE).
How They Are Calculated:
- Amount:
- Each payment on account is typically half of your previous year’s tax bill.
- For example, if your tax bill for the previous year was £2,000, each payment on account would be £1,000.
- Due Dates:
- First Payment: January 31 (during the tax year)
- Second Payment: July 31 (after the tax year ends)
Balancing Payment:
- After the end of the tax year, if your actual tax bill is higher than the payments on account made, you’ll need to make a balancing payment by January 31 of the following year.
- Conversely, if your tax bill is lower, you may receive a refund or have it applied against future payments on account.
Reducing Payments on Account:
- If you believe your income for the next tax year will be lower, you can apply to reduce your payments on account. This can be done online through your HMRC Self Assessment account or by completing form SA303.
Practical Example:
- Tax Year 2022/23: Tax bill is £3,000.
- First Payment on Account (31 Jan 2023): £1,500
- Second Payment on Account (31 Jul 2023): £1,500
- Tax Year 2023/24: Actual tax bill is £4,000.
- Balancing Payment (31 Jan 2024): £1,000 (since £4,000 – £3,000 = £1,000)
- Payments on account for 2023/24 will be based on the £4,000, so each payment on account for the next year would be £2,000.
Summary:
Payments on account help manage the tax payment process by spreading the load across the year, reducing the burden of a single, large tax bill. It’s essential to monitor your income and tax liabilities to adjust these payments if necessary, ensuring you avoid over payments or underpayments.