What are Payments on Account?
Payments on Account are a method of paying towards future self-assessment tax bills. They are payable twice a year and each payment is normally 50% of the previous year’s tax liability.
Payments on Account are payable by midnight on 31 January and 31 July.
How does it work?
The first instalment is due on the 31 January. This amount will be 50% of your previous tax year’s tax liability. This is the same day that a balancing payment must be settled for the previous tax year.
The remaining 50% will be due by 31 July. This enables your tax liability to be spread out throughout the year.
How about an example?
You owe £4,000 on earnings between 6 April 2015 and 5 April 2016 (excluding Class 2 National Insurance).
This amount will need to be settled by 31 January 2017. On top of this, a payment of £2,000 will need to be paid at the same time and again on 31 July 2017.
This means that when you file your self-assessment tax return for 2017 you will have already paid £4,000 towards it.
If you have overpaid, you will be due a refund. If you have underpaid, this difference will need to be settled by 31 January 2018.
Are Payments on Account voluntary?
If the tax bill from the previous year was over £1,000 then Payments on Account are required. However, if more than 80% of that year’s tax liabilities have been paid at source (e.g. through PAYE) Payments on Account are not required.
Can Payments on Account be reduced?
It is not unusual for earning’s to fluctuate year to year. If this is the case and earnings are forecast to be lower for the next financial year; an application can be made to reduce the Payments on Account via HMRC.
It is worth noting that if earnings remain the same and do not decrease after you have reduced the Payments on Account, that the difference will need to be settled by the preceding January plus any interest accrued.
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