When does payment on account apply?
If you owe more than £1,000 in tax and less than 80% of your income tax is collected at source e.g. thought PAYE, then HMRC will require you to make payments on account. For example if you tax bill for 13/14 was £2,000 then you will pay 2 installments of £1,000.
When do you need to pay?
You make 2 payments each year:
- 31st January during the tax year in question
- 31st July after the tax year end
By making 2 payments you spread the cost a bit like paying monthly if you are an employee.
How does HMRC know how much you need to pay?
Payments on account are based on the last tax year. Therefore if you owed £2,000 for the 14/15 tax year you will need to make 2 payments on account of £1,000 for the 15/16 tax year.
If you know you are going to pay too much in tax, e.g. you are winding your business down, you can apply to HMRC to have the payments reduced. Be warned if you reduce the payments too much then you could be charged interest and penalties by HMRC.
If it turns out that you should have paid more tax in the year then you will need to make a balancing payment on 31st January and future payments on account will be adjusted. For example it turns out that your tax bill for the year is £2,500 you have already paid £2,000 so a balancing payment of £500 will be due on 31st January. You future payments on account will be increased to £1,250.
Making payments on account for the first time
This can be a nasty surprise if you haven’t prepared for it as you will be expected to pay all the tax for the previous tax year and the balancing payment all in one go. Using the figures above that would mean a bill of £3,000 (£2,000 for 14/15 and £1,000 payment on account for 15/16).
It’s one reason to do your tax return as soon as possible so you have time to save for the bill if you hadn’t expected it.
The good news is that the more tax you owe the more money you are making which is the aim of being in business!
If you need assistance with completing your tax return or understanding payments on account please get in touch