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Payments on Account – Explained

Sometimes overlooked when calculating a persons tax due, payments on account are effectively the taxpayer paying tax in advance.

Generally speaking, when a persons self assessment tax liability is above £1,000 for a tax year, HM Revenue and Customs will ask that person to make Payments on Account for the following tax year.

The amount to be paid on account is the same figure of the tax liability of the previous year split 50:50 and payable on 31 January and 31 July.

EG – If your tax liability for the year ended 5 April 2014 is £4,000 then you will be asked to make payments on account for the tax year ended 5 April 2015 of £2,000 (payable 31 January 2015) and £2,000 (31 July 2015).

These Payments on Account will sit as a credit on your tax account until the return is filed for 5 April 2015 and offset against that tax liability for the year.

In our experience this can lead to two circumstances where the taxpayer is caught out:

Drop in self employment profits/income – 

If your profits/income have fallen in the current tax year then it stands to reason that your tax liability could fall too.  Should this happen, then the Payments on Account you make (based on a higher profit figure of last year) could be too high.

Don’t panic if this is the case.  All you need to do is complete your self assessment tax return prior to 31 July so that you know what the tax figure for that year is going to be.  You can then reduce the second payment on account due on 31 July to the correct figure and not have to make the original Payment on Account only to get a repayment later.

IMPORTANT – Payments on Account are tax which is due.  Therefore incorrectly reducing your Payments on Account (see example above) could lead to the correct amount be reinstated by HM Revenue and Customs and interest due on unpaid tax.

First year of trade –

It is often thought that when you commence self employment you have the first year with no tax deducted.  What we mean by this is if you started to trade on 6 April 2014 your first tax bill will not be due until 31 January 2016.

This may sound great but you then need to factor in the Payments on Account.  On 31 January 2016, not only will you have the tax to pay for the year ended 5 April 2015, you will also have the first Payment on Account for the tax year ending 5 April 2016.  This will be followed by the second Payment on Account for that tax year due on 31 July 2016.

You have therefore gone sometime without needing to pay a tax liability but then are asked to pay 2 years worth in 6 months.  Definitely one to think about.

The above is only a guide on Payments on Account and how we see it affecting our clients.  It goes without saying that with up to date records and contact with us will mean that you pay the correct amount of tax and the right time.