Tax Payments on Account
Once you have submitted your tax return, you will know your tax bill and what you owe. Payments on account spread the cost of next year's tax bill into 2 instalments over the year. It was designed as a method for paying some of your tax bill in advance and therefore preventing people being indebted to HMRC.
We suggest submitting your tax return information early to your adviser which will provide you enough time to plan and enable you to set aside money regularly in order to fulfil your tax liability payments.
So how does it work?
The first instalment is due by midnight on 31st January and is calculated by looking at your previous year's tax bill. Then the second instalment will be due by 31st July. Each of your instalments will usually be 50% of your previous tax bill.
Assuming this is your first Self Assessment: Based on the 17/18 tax year you owed a total of £50,000 tax, which means that you would have to make a first payment on account (POA) by 31st January 2019 of £25,000 (in addition to your tax for 17/18) and then another £25,000 by 31st July 2019.
This sounds simple but you may need to factor in a 'balancing payment' moving forward.
You've paid £50,000 by 31st July based on your 17/18 tax year. However your total tax owed for the 18/19 tax year comes to £70,000 owed in tax. This means that you have an outstanding balance of £20,000 (£70,000 minus £50,000 already paid in POA). This is called the 'balancing payment' and it has to be settled by 31st January 2020.
This would mean your payments would look like this for 2020:
January 31st - £20,000 balancing payment, plus £35,000 (First POA) for the 19/20 tax year (which is 50% of your 18/19 tax bill).
July 31st - Second POA - 50% based on your 18/19 tax year - £35,000
You will not need to make 2 payments in the year if:
- you've already paid 80% or more of the total tax you owe through your employment
- Your self assessment based tax bill came in at £1000 or less
Instances of over payment
Payments on accounts can become difficult if you earn a lots of income one year and then this drops significantly the next. If you foresee a cash shortage you can request HMRC reduce your payments on account but if they are reduced too much HMRC will charge you interest and penalties for underpaying. Alternatively HMRC will refund you if your payments on accounts are greater than your tax bill.
Things to note
Payment on account exclude sums you owe for capital gains or student loans. These are covered in your balancing payment.
You can access what you owe through the HMRC online services which provides you with historical data and what is owed for that year so you can plan putting money aside.
For help and advice on how you can become tax efficient contact us today