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Payments on account are payments made towards next year's tax bill. They are calculated based on your tax bill the previous year. This simply means that HMRC is making a predication on your tax bill based on your past income. Payments on account are expected in two instalments - one on January 31st and the other on July 31st.
When you file your self assessment tax return and your tax is calculated, HMRC assumes you'll owe about the same next time.
When you settle up your tax bill in time for the normal deadline (31st of January) you also have to make your first payment on account for the following year. The amount will be half of the previous year's tax bill.
Six months later, by the 31st of July, you'll have to make your second payment on account. Again, this will be for half of the previous year's total tax bill.
If you paid £2,500 on account for 2014/15 and you find that you're actually due to pay £2,700 when you come to do your tax return, you'd pay a “balancing payment” of £200 to HMRC by 31st January 2016. Your two payments on account for 2015/16 would each be half of £2,700 (the previous year's tax bill)
By this time, you've probably paid up basically all the tax you'll owe in your next bill. If your income changes, you'll settle up by the normal 31st of January deadline. If your payments on account mean you've paid too much tax, you will be due a tax rebate.
If you're new to filing your own tax returns, it's easy to get confused. Our Self Assessment tax return service can do a lot more than just carry the weight of that paperwork for you. Whatever problems you're having with HMRC or your tax return payments, RIFT has the solution. We can help with everything from understanding HMRC's notorious "payments on account" to deciding which accounting method works best for you.
For example, if your accounts are fairly simple, you might consider using the "cash basis" for working out your expenses. This system allows many self-employed people to avoid a lot of the complexity about when "costs" become "allowable expenses". It also means that you can count your money when it actually comes in, rather than when you send out your invoices. It can be less of a headache than the standard "accruals" basis, but you have to opt into it. As always, RIFT can talk you through your choices and help decide what suits your business.
Payments on account are for self-employed people, and apply to both your income tax and class 4 National Insurance contributions. If you need to make them, you'll see the amounts and deadlines when you sign into your HMRC self assessment website.
You can make your payments on account the same way you pay your normal self assessment tax bills, by:
If you're sure your payments on account will amount to more than you'll owe in your next bill, you can get them reduced. You'll need to be pretty certain about it, though. You can make the application through your self assessment account or by sending form SA303 to HMRC.
If you realise you won't be able to make your payments on account in time, you need to let HMRC know immediately. Don't bury your head in the sand and hope the taxman forgets about you, because he won't. Worse still, you'll probably end up paying interest and penalties on top of the late tax. Take a look at our self assessment tax return deadlines to ensure you don't miss a single one.
Of course, if you've already got RIFT on your team, we'll take care of your HMRC troubles for you. It can be hard to get through to the taxman, with long phone queues and hard questions to answer. At RIFT, we've been solving tax problems for clients since 1999. No one understands HMRC better than us, and no one goes further to keep you in their good books. Get in touch with RIFT to find out more.
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