Payments on Account for Self-Assessment
In this video we'll look at Payments on Account and what they mean for self-assessment taxpayers such as self-employed individuals, limited company directors, those receiving incoming from property and other earnings that are not typically taxed through PAYE (Pay As You Earn).
What are Payments on Account?
Payments on Account are essentially prepayments towards the current year based on the previous year's liability. These payments are based on the liability from the previous tax year ended 5th April and will be payable in two 50% instalments. Effectively this will cause you to pay the same amount of tax towards the current year.
When are Payments on Account added to your Self-Assessment liability?
HMRC only requests Payments on Account if your tax liability exceeds £1,000. The tax liability payable through self-assessment must also exceed 20% of the total tax due for the year. For example if your total tax payable for the year is £50,000, but the self-assessment liability is only £2,000 (i.e. most of the tax was paid through employment), HMRC would not ask you to make Payments on Account. Instead there would be a one-off payment due by 31st January as normal.
The first year is the most awkward for Payments on Account, as the entire tax liability plus an extra 50% instalment would be due in one payment. In future years with regular Payments on Account, you would only be paying a small balancing payment (if there is a difference in your tax liability) along with two 50% instalments due by 31st January and 31st July each year.
How are Payments on Account calculated?
Payments on Account are calculated by simply dividing your most recent self-assessment liability into two equal instalments. This would include Class 4 NICs for self-employed individuals, but would exclude any student loan repayment due. These payments are always based on your actual tax liability, but you can ask HMRC to reduce them.
What are the deadlines for Payments on Account?
The tax year ends on 5th April and the self-assessment deadline is 31st January; about 9 months later. Payments on Account, if required, are due by 31st January (the same as the normal liability) and 31st July, about 6 months later.
Please note, the payments on account are allocated towards the tax year that ends in-between the two payment deadlines on 5th April. Only the first 50% instalment would be payable before the tax year ends. The second would be payable a few months after. In theory, this would allow you to file your next self-assessment before the Second Payment on Account is due. If your liability is significantly lower, you may not need to pay the second instalment.
Can Payments on Account be refunded?
Once your next self-assessment tax return is filed with HMRC (possible anytime after 5th April), the actual liability would be updated in your personal tax account. Your Payments on Account would reduce the balance of tax owed. If it turns out that the tax due for the year is less than your Payments on Account, you would usually be able to request a refund from HMRC for the difference.
Payments on Account will be calculated on the next self-assessment return if the following conditions are met:
- Your tax liability is £1,000 or more
- Relevant amount of tax payable through self-assessment exceeds 20% of the total tax liability for the year
This also means if your next tax liability is lower, but the you still meet the criteria to make payments on account towards the following year, you could offset the overpayment of tax towards the next 50% instalments rather than requesting a refund.
How to Reduce or Remove Payments on Account
As previously mentioned, you would have the option to request that the payments on account are either reduced or removed completely. This is only recommended if you have an accurate estimate of your income for the current tax year and can correctly predict your next liability. We always recommend using a conservative estimate, where the payments on account would be slightly higher than what you're expecting to pay in tax. Remember that payments on account are 50% instalments, so an anticipated tax liability of £1,500 would be two payments of £750 each.
If the payments on account end up being less than your actual liability for the year ending 5th April, HMRC will charge late payment interest on the first 50% instalment. Unfortunately the first payment on account will always be late as it's due by 31st January and the tax year will only end a few months later on 5th April.
Summary
Payments on Account are a mechanism where HMRC can receive tax payments nearer to when the year ends, rather than 9 months later. This mostly affects taxpayers earning the majority of their income outside of PAYE and regularly pay tax through Self-Assessment. For example those that are self-employed, earning salary and dividends from their own limited company, and landlords earning income from property would be generally be required to make Payments on Account.
Need more time to pay your tax liability?
It's recommended to contact HMRC as soon as possible if you know that you won't be able to pay your tax liability on time or have missed the deadline. They will help with arranging a payment plan, usually in monthly instalments based on what you can afford. In most cases you would be able to arrange a payment plan online if the following conditions are met:
- your latest tax return is filed
- the liability is £30,000 or less
- it's within 60 days of the payment deadline
- you don't have any other payment plans or debts with HMRC
Further guidance, along with the link to arrange a payment plan for self-assessment can be found here: https://www.gov.uk/difficulties-paying-hmrc
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