We often answer questions from clients regarding payments on account and this is often an area that is misunderstood. Payments on account simply refers to the timing of income tax payments for those who fall under the Self Assessment tax regime.
Payments on account are payments of tax towards your final tax bill for the tax year in question. These are often likened to advance payments of tax, which is correct to some degree.
Taxpayers who are required to complete a Self Assessment Tax Return and who pay income tax via this method will be required to make payments under the payment on account process.
Payments on account result in two annual payments of income tax to HMRC each year. Each payment equates to exactly half of the previous tax years income tax bill.
Payments are due to be received by HMRC on the following dates:
1. 31 January
2. 31 July
You can see why this is likened to advance payments of tax since half is due on 31 January which is prior to the end of tax year. However, the remainder is paid after the end of the tax year. We liken these patents to a six monthly catch up payment, as when compared to monthly PAYE and monthly income tax deductions, payments on account still delay payments of income tax somewhat.
In addition to the above, it should be noted that a top up payment is required if your tax bill increases when compared to the prior tax year. The top up amount will be equal to the current tax bill less the previous years tax bill. This payment is due to be received by HMRC by 31 January following the end of the tax year. So for the tax year ending 5 April 2016 the top up payment is due 31 January 2017.
Always remember that payments on account do not include any amounts for capital gains or student loans. If either of these apply you will need to make further payments.
There are circumstances that exempt a taxpayer from making payments on account. These are as follows:
1. Your last self assessment tax bill was less than £1,000.
2. You’ve already paid more than 80% of the tax you owe. For example, tax deduced by bank’s on savings interest.
If you know that your tax bill is going to be less than last year you can ask HMRC to reduce your payments on account.