Schedule a Call
We are not just accountants, we are business owners. We understand the myriad of pressures on your time.
Our focus is your success through combining the latest technology with traditional values.
When you get hit with HMRC’s self assessment payments on account for the first time it can come as a real shock. So how do you stay on the good side of payments on account, make sure they aren’t so bad for your cashflow and avoid those ugly surprises.
If you submit a self assessment tax return, you may have to make payments on account.
Payments on account are advance payments to HMRC towards your next self assessment tax bill. If you end up with a tax bill over £1,000 you may have to make payments on account towards the next tax year.
Payments on account are based on income tax and any Class 4 National Insurance (if you’re self employed). Capital Gains and Student Loans are not taken into account.
If your self assessment tax bill is less than £1,000 then you don’t have to make payments on account.
If you already paid more than 80% of the tax owed through your tax code via PAYE then you also don’t have to make payments on account. This applies even if the tax that you owe is more than £1,000.
The first payment is due by 31 January, the same deadline as your tax return.
The second payment is due by the following 31 July.
When your tax return is submitted, any balance not covered by the payments on account will be due by the following 31 January along with the first payment on account for the next tax year.
If your payments were higher than the tax owed then you will be due a refund. You can choose to put this towards reducing the first payment on account for your next tax year.
The payments on account are based on your previous tax bill (not including capital gains and student loans). So if your tax bill was £5,000 then the two payments on account for the next tax year will be £2,500 each.
If your tax bill is pretty consistent then payments on account should work nicely for you. Most of your tax is being covered by the January and July payments and then the difference is either a small payment or refund the following January. You’re making two payments each year, both of similar amounts. It’s all pretty good.
If you have inconsistent income then payments on account won’t work so well and may have a negative impact on your cashflow. If income drops, you might find yourself forking out for a large payment on account, just at the time when your cashflow is low. Or alternatively if income rises, you could have a large amount to settle in January along with a hefty first payment for the next year.
It can really be an ugly situation for your cashflow if you fall into payments on account for the first time. You’ve had no payments towards your current year tax bill so there’s the whole of that bill to pay in January. You also have the first payment on account for the next year due at the same time. It ends up with 1.5 times your tax bill due in January. Because of the almost 10 month time lag between the tax year end and the tax becoming due, changing circumstances can leave you with a large tax bill that you may struggle to pay.
If you know your tax is going to be lower, then you can reduce your payments on account for the next tax year.
When you submit the current year tax return it will show your payments on account for the next year and give you the chance to alter them. You can also make changes online via your tax account during the year or via form SA303.
But beware of setting them too low. It might seem like a good way to help your cashflow but it can have consequences.
If you reduced your payments on account lower than the amount of tax you end up owing in your return, HMRC will automatically revert them back to their original amount or to the total tax owed (whichever is lower).
They will expect anything underpaid to be settled straight away, rather than the next January. If it’s after July when you submit the return then any underpaid balance will be due immediately.
They will also charge interest on the underpaid amount, backdated to when each payment on account was originally due.
Altering your payments on account can be very effective to deal with changing income. However always take a conservative approach. You may benefit from chatting to your accountant to help work out an accurate figure rather than risk making a guess which turns out to be far too low.
There are three ways that you can avoid the uglier impacts of payments on account. They do all require a bit of organization, but it’s well worth it in terms of saving you stress at payment time.
Making sure you are on top of your income throughout the year can prevent surprises in January. Getting an idea how your taxable income is shaping up can help you make decisions and if necessary changes, before it’s too late. This particularly applies to company directors taking dividends who can have a bit of flexibility with dividend timing.
This follows on from the previous tip. If you know your taxable income then you can start to save regularly for your tax bill. Even if you don’t quite get it right, the lag between the tax year end and payment deadline means you have time to make up any shortfall. This is particularly true if you follow tip 3 and find out your tax figure nice and early. Spreading the cost more evenly across the year is definitely healthier for your cashflow than trying to find a large lump sum at short notice.
Your accountant can help work out your taxable income and an appropriate figure to save each month based on your income and estimated tax.
The sooner after the 5 April tax year end you prepare your tax return, the more time you have to deal with any consequences. Plus there may be some benefits. Submitting your return before 31 July could reduce your second payment on account if your tax is lower than expected. If the tax is higher than expected it gives you time to save before the balance becomes due in January.
If you need advice with personal tax planning and working out your taxable income or support with your self assessment tax returns, then maybe our personal tax team can help? Just get in touch via email on firstname.lastname@example.org or give us a call.
The chancellor’s breezy Autumn statement 2023 speech was all about attempting to deliver a boost to the economy through a…
The director’s loan is one area that causes a great deal of confusion for limited companies. What is it and…
On 1 April 2023 there were some important changes to corporation tax. The rate changed, increasing from 19% to 25%…