Do you need to make a payment on account?

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Date: 6 July 2021

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Payments on account can be a common stumbling block when it comes to your self-assessment tax return. Although it was introduced to help taxpayers spread their tax payments, it can actually harm your cash flow if you are caught unaware.

Payment on account: What you need to know

Everyone knows about the 31 January self-assessment deadline. It is the date by which you must file your tax return and pay any taxes due. However, if your self-assessment tax bill is more than £1,000, a payment on account may also be required.

On 31 January, each year you may need to make a payment to HMRC. This payment will settle any outstanding tax for the last tax year and will include an upfront payment for the next tax year.

You also need to make a further payment on account on or before the 31 July each year.

Both payments are based on what you earned last year, instead of the current state of your finances. That's because HMRC can't predict how your income is going to fluctuate; it's assumed that you will earn the same income, every tax year, even though that might not be the case. 

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How is the payment on account calculated?

Basically, any payment on account is equal to 50% of the previous year's tax bill.

Whether this is your first tax bill is over £1,000 or your first year of trading, you need to know what to expect the first time you make a payment on account.

Example payment on account

If you began trading in 2020/21 and have a tax bill of £1,400 for that year, the tax would need to be paid on 31 January 2022.

However, because your tax bill is over £1,000, you'd also have to make your first payment on account for the 2021/22 tax year.  This is calculated as 50% of the amount due for 2020/21.

In this case that would be £700. This means that you'd owe £2,100 to HMRC on 31 January 2022.

20/21 tax bill = £1,400
21/22 upfront = £700 (1st payment on account)
Total    = £2,100

A further £700 would be payable 31 July 2022 (second payment on account).

As a side note, Class 2 National Insurance contributions are not included in the calculation for payments on account. This is deducted before multiplying your tax bill by 50%. But for simplicity, it hasn't been taken into account in the calculation above.

Can I reduce the payment on account due?

Yes, it is possible to reduce your payment on account. It's important to remember that payments on account are based on your earnings from the previous year. This means that, should your income fall dramatically, your payments on account may be reduced to reflect a lower income. You can therefore make a claim to reduce your payments on account. Be careful though: reduce them too much and you can incur an interest charge on any tax shortfall.

What if I can't afford my payment on account?

Under normal circumstances you should contact HMRC as soon as possible. Should you miss the deadline without informing them, you'll start to accrue interest and late payment surcharges.

By contacting HMRC, they may agree a time to pay arrangement. You will still be charged interest but you could avoid any surcharges.

How to pay your tax bill

HMRC are encouraging people to complete their self-assessment tax return online as part of MTD for Income Tax. This can be done in most cases via the HMRC website or commercial digital software. If you file your self-assessment online, you can make your payment on account at the same time if you want. If you submit a paper tax return, you will receive a paper bill with a Bank Giro form to make your payment.

As with all tax matters, if you are unsure what you need to do or how much you should pay, you should speak to someone with tax knowledge or call the HMRC. Making regular checks ahead of the self assessment deadlines can help you avoid any penalties and charges.

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