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What are payments on account and who needs to make them?

“Payments on account” are advanced payments made twice a year by self-employed individuals on account of tax due in the next tax year. Payments on account are only payable if your last self-assessment tax bill was more than £1,000 or if less than 80% of your total tax owed is collected at source, i.e. through employment.

HannahWhen are payments on account made?

The first of these payments are due for payment on 31 January, with the second due on 31 July. The amount of each payment is determined based upon the previous year’s tax bill.

For example, if a self-employed individual had a tax bill of £5,000 for the 2015-16 tax year, then two payments on account of £2,500 (50% of the previous year’s liability) would be due for payment on 31 January 2017 and 31 July 2017 in advance of tax due for the 2016-17 tax year. This is assuming £5,000 tax will be payable for the 2016-17 tax year.

If you still have tax to pay after you’ve made your payments on account, you must make a ‘balancing payment’ by 31 January 2018.

Payments on account don’t include anything you owe for capital gains or student loans; you’ll pay those in your ‘balancing payment’.

What if I don’t expect my tax bill for the next tax year to be as high?

If you anticipate or know your tax bill is going to be lower than the previous year, you can ask HMRC to reduce your payments on account. If you’d like to reduce your payments on account but are unsure of how to do so, please don’t hesitate to get in touch as we’d be more than happy to assist!

For example, if you anticipate your tax bill for the next tax year to be £2,000 rather than £5,000, a claim to reduce your payments on account can be submitted to HMRC. When claiming to reduce these payments on account, you should inform HMRC of your anticipated tax bill for the next tax year and request that your payments on account be adjusted accordingly. In this case, from £2,500 to £1,000.

When claiming to reduce payments on account, you need to be aware of the implications should your tax bill be as high or higher than the previous year, after a claim is made and accepted by HMRC.

The idea of payments on account are that the cost of paying your tax bill is spread across the year. Therefore, if a claim to reduce payments on account is made but the final bill turns out to be as high if not higher than the previous year, then there will be a shortfall in the amount of tax paid. In this instance, HMRC will deem that a claim to reduce payments on account should not have been made and have the right to charge interest on the shortfall.

What if my payments on account are higher than my tax bill?

If you make payments on account that amount to more than your tax bill, there’s no need to panic, HMRC will issue a tax refund to include a small amount of interest on the overpayment.

If you have any queries about your own payments on account, or would like to speak to one of the team at EST Accountants about your taxes, please don’t hesitate to get in touch.