Payments on Account: What You Need to Know

If you’re a UK taxpayer who files a Self Assessment tax return, you might be required to make payments on account. These advance payments can catch many by surprise, but understanding them is crucial for effective financial planning. This blog will demystify payments on account, helping you manage them with confidence.

1. What are Payments on Account?

Payments on account are advance payments towards your next tax bill. They help spread the cost of your tax liability across the year, rather than paying it all in one go. HMRC typically requires payments on account if your last Self Assessment tax bill was over £1,000 unless 80% or more of your tax is deducted at source (e.g., PAYE).

2. Who Needs to Pay?

You will need to make payments on account if:

• Your last Self Assessment tax bill was more than £1,000.
• Less than 80% of your total tax was collected at source.

For example, if you’re self-employed or have significant income from savings or investments, you’re likely to be required to make payments on account.

3. How Are Payments on Account Calculated?

Payments on account are based on your previous year’s tax bill, excluding student loan repayments and capital gains tax. You make two payments on account each year, each amounting to half of your previous year’s tax bill. These payments are due by 31st January and 31st July.

Example: If your tax bill for the 2022/23 tax year was £2,000, each payment on account for the 2023/24 tax year would be £1,000.

4. Balancing Payment

If your actual tax bill for the current year is higher than the payments on account made, you’ll need to make a balancing payment by 31st January of the following year. Conversely, if your tax bill is lower, HMRC will refund the difference or offset it against future tax bill.

Example: If your payments on account for 2023/24 were £1,000 each (total £2,000), but your actual tax bill was £2,500, you would need to make a balancing payment of £500 by 31st January 2025.

5. Reducing Payments on Account

If you believe your income for the current year will be lower than the previous year, you can apply to reduce your payments on account. This can help manage your cash flow better. However, be cautious: if you reduce your payments too much, you might face interest charges on the underpaid amount.

6. How to Pay

Payments on account can be made through various methods, including:

• Online or telephone banking
• Direct Debit
• BACS or CHAPS
• Debit or credit card online
• At your bank or building society

Ensure you use your unique taxpayer reference (UTR) as the payment reference.

7. Staying on Top of Payments

Managing payments on account can be challenging, especially if your income fluctuates. Here are some tips to stay on top of them:

• Budgeting: Set aside money regularly to cover your tax payments.
• Record Keeping: Maintain accurate records of your income and expenses.
• Forecasting: Regularly review your financial performance and adjust your tax estimates accordingly.
• Professional Help: Consider seeking advice from a tax professional to ensure you’re meeting your obligations and making the most of available reliefs.

Payments on account are an essential part of the UK tax system for many self-assessment taxpayers. Understanding how they work and how to manage them can save you from unexpected tax bills and help maintain smooth cash flow. Always stay informed about your tax obligations and don’t hesitate to seek help if needed. For personalized advice and assistance, remember that Helpbox is here to help with all your tax-related queries.