For many self-assessment taxpayers, understanding what payments need to be made can often be extremely confusing. One aspect of personal tax that can be particularly unclear is the concept of ‘Payments on Account’ for Self-Assessment.  

What are Payments on Account?

Payments on Account are a method used by HM Revenue and Customs (HMRC) to help taxpayers spread the cost of their tax bill across the year. They are advance payments towards your tax liability for the upcoming tax year. These payments are made in two instalments – the first due by 31 January and the second by 31 July.

Who is Subject to Payments on Account?

Payments on Account apply to individuals who are required to submit a Self-Assessment tax return. You will be subject to Payments on Account if your previous year’s tax and Class 4 National Insurance liability is £1,000 or more, unless you have already paid more than 80% of your tax liability through deductions at source (usually PAYE on salary or pensions).

Calculating Payments on Account

Calculating Payments on Account involves estimating your tax liability for the upcoming tax year. HMRC calculate the payments on account by halving the previous year’s tax and Class 4 National Insurance bill. This makes up the amount that the two payments will equal. For example, if your total tax bill for the previous tax year was £10,000, your Payments on Account for the current year would each be £5,000.

However, this estimation assumes that the same amount of tax will be due each year. This might not accurately reflect your actual tax liability for the current year. If your income fluctuates significantly, you might end up paying more or less than your actual tax liability, resulting in a repayment or balancing payment. Therefore, it’s important to understand and review your financial situation so that you can adjust your Payments on Account accordingly. However, if you do decide to lower your payments on accounts, and they are reduced by too much, interest will be charged.

How we can help

Tax regulations can be complex and subject to change. Consulting a qualified accountant or tax advisor can provide you with expert guidance tailored to your specific situation. GE is always happy to help, get in contact with a member of our tax team today.