My tax return has been submitted and I’ve been advised that I need to make payments on account. What does this mean; and how do I work them out?

What is a payment on account?

If you are self-employed or have income that is not taxed before you receive it, you may have a tax bill to pay, but are you aware of the payments on account due?

Normal Due Date

Tax calculated under Self-Assessment for any given tax year is normally due on 31 January after the tax year

eg 31 January 2024 for 2022-23 tax year.

Payments on Account

If your tax liability is more than £1,000 then you will normally have to make payments on account for the next year:

  • Payments on Account are calculated automatically based on the preceding year at a rate of 50% of the liability for the year just passed
  • There is a 50% payment on account 31 January and another 50% 13 July – these are offset the following January
  • If the payments on account exceed the amount due you get a refund

Furthermore, if your tax return has been prepared by 31st July you will be aware of your actual tax liability and can therefore pay the correct amount at this date, rather than the estimate.

There is therefore an incentive to get your tax return prepared and submitted earlier!

It should be noted that payments on account include Class 4 National Insurance Contributions.

Payments on Account are not required to be made where either:

  • If you have paid more than 80% of your tax at source, e.g. via PAYE; or
  • The tax due for the previous year is less than £1,000.

Reduced  payments on account

As Payments on Account are calculated automatically from the previous year’s tax, if you know your income will be lower next year it is possible to apply to HMRC to have the Payments on Account reduced.

When making a claim to reduce payments on account, the taxpayer must specify the amount that they wish to pay. The taxpayer must make this claim by notice in writing, giving reasons why the payments on account should be reduced. For example:

  • A rental property has been sold/no tenant in the year
  • Self-employment has been ceased/downturn in the business
  • Receiving lower dividends or untaxed interest than in the previous year

Incorrect Reduction of Payments on Account

Should the payments on account be reduced too much HMRC will now charge a rate of 7.75% (!!) on underpaid tax each day it is outstanding from 31 January and 31 July.

Time To Pay
If you are struggling to pay taxes, then its advised you contact HMRC and agree a payment plan as soon as possible.

Payment on Account example

If your bill for the 2022 to 2023 tax year is £3,000 and you made two payments on account last year of £900 each (£1,800 in total).

The total tax to pay by 31 January 2024 is £2,700. This includes:

  • Your ‘balancing payment’ of £1,200 for the 2022/2023 tax year (£3,000 minus £1,800)
  • The first payment on account of £1,500 (half your 2022/23 tax bill) towards your 2023-2024 tax bill
  • You will then need to make a second payment on account of £1,500 on 31 July 2024.

If your tax bill for the 2023/24 tax year is more than £3,000 (the total of your two payments on account), you’ll need to make a balancing payment by 31 January 2025.

How to check your payments on account

You can check your payments on account anytime during the year by signing in to your personal tax account and again selecting the option to view your latest self-assessment return. If you click ‘View statements’, you’ll be able to see any payments on account that have already been made, alongside payments that need to be made towards your next tax bill.

For any further support please contact Anna at PGR Accountants