19th January, 2023, Henry Pettitt
If you are recently self-employed, or in receipt of rental income or other sources of untaxed income, this may be the first year that you will be asked by HMRC to make payments on account to them, and you might be wondering why…
What are payments on account?
Payments on account are payments to HMRC towards your next year's income tax liability. They are advance payments towards your tax bill (including Class 4 National Insurance if you’re self-employed).
Each payment is half your previous year’s uncollected tax bill. Payments are usually due by midnight on 31 January and 31 July.
Payments on account do not include anything you owe for capital gains or student loans (if you’re self-employed) - you’ll pay those in your ‘balancing payment’.
Do I have to pay the payments on account?
Yes. If you're a UK taxpayer who pays less than 80% of your income tax at source and your tax bill is over £1,000, you will be asked by HMRC to make payments on account. However, if you expect your tax liability to be less in the following tax year you can make a claim to reduce your payments on account. If your adjusted payments on account are not sufficient to cover your liability, HMRC will charge 6 per cent interest (rate from 6 January 2023). If your payments on account are more than your tax liability, HMRC will pay repayment interest at 2.5% (rate from 6 January 2023). If you will struggle to make the payments, you talk to HMRC about their Time to Pay scheme.
How are payments on account worked out?
For example:
If your tax liability for the 2020 to 2021 tax year is £3,000, and you haven’t made any payment on account towards this, you would owe HMRC £3,000 by 31 January 2023 to cover 2020/21.
In addition to this you will need to pay HMRC £1,500 towards your 2021/22 tax bill by 31 January 2023 and another £1,500 towards your 2021/22 tax bill by 31 July 2023.
If your tax bill for the 2021 to 2022 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2024.
What if my circumstances change and I end up overpaying?
If you end up paying too much in advanced tax payments, HMRC will give you the difference back. This will either be via cheque or bank transfer, or by deducting the difference from your next tax bill.
If you know that you will pay too much on account because your tax bill next year will be lower, if you’re winding your business down, or because you’re passing retirement age and will no longer have to pay class 4 National Insurance, you can apply to HMRC to reduce your payments on account.
If you need help with working out your tax liability and ensuring you are compliant with HMRC please get in touch as soon as possible.
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Useful links: HMRC: Payments on account
