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Payments on Account

Dave Jangid | Online Account Filing

Dave Jangid | March 3, 2020

Payment-on-Account | Online Account Filing

Payments on account mean upfront payments, made by you, for your self-assessment tax bill (including Class 4 National Insurance) if you’re self- employed). HMRC assumes that you will continue to earn at the same rate as the previous year, hence according to them, you are to pay roughly the same amount of tax in the following year. For reducing the burden on sole traders for paying the taxes they owe in one go, HMRC runs ‘Payments on account’. Besides spreading the tax payment over the year for the taxpayer, it is also a useful tool to give the government treasuries a financial boost in the middle of the year.

Payment on Account | Online Account Filing

Applicability

The scheme was introduced for taxpayers who pay most of their tax through self-assessment. If your self-assessment bill is more than £1,000, then you simply need to pay your tax through this scheme of advance payments. But, if more than 80% of your income gets taxed through the HMRC PAYE account, then the scheme won’t apply to you. It’s noteworthy here that, anything owed by you for capital gains or student loans (if you’re self-employed) does not count as part of payments on account, it needs to be paid as ‘balancing payment’.

Note: Payments on account do not include anything owed for capital gains or student loans (if you’re self-employed). You will have to pay those as a part of your ‘balancing payment’.

Periodicity

Payment on Account enables the sole traders to pay their taxes in two half-yearly instalments, with a tiny catch… The instalments are to be paid in advance, based on your last year’s income. Each instalment is half the previous year’s tax bill which are due to be paid by midnight on 31 January and 31 July, respectively.

Example

The previous tax year is 2017-18

Actual tax liability for 2017-18 = £1,200

Since the liability is more than £1,000 hence the taxpayer will be liable to pay tax for 2018-19 as payment on account.

So, on 31 January 2019, the taxpayer shall pay 1st instalment of POA for the tax liability of the year 2018-19 = £1,200/2=£600 in addition to paying tax bills for the year 2017-18

On 31 July 2019, the taxpayer shall pay 2nd instalment for POA for the tax liability of the year 2018-19 = £1,200/2 = £600

Now, on 31 January 2020, the actual tax liability for the year 2018-19 came out to be £2,000 so now on 31 January 2020 following payments shall be made:

  1. Balancing payment for tax year 2018-19 = £2,000 - £1,200 = £800
  2. Since the tax bill for the year 2018-19 exceeds £1,000 so again the case falls under a POA and the 1st instalment of POA  for the year 2019-20 shall be payable £2000/2 = £1,000

Reducing the payments on account

The amount payable as ‘payments on account’ primarily depends on the previous year’s tax bill. However, there is a chance where you might feel your income to be lower than that earned in the previous year. In such cases, you can apply to HMRC to reduce the amount payable as ‘payments on account’. Application to HMRC can be made either online or by post through form SA303.

Underpaying or overpaying taxes

PoA is based on estimated figures. So, in case if taxes are overpaid then HMRC gives the refund back, but if the taxes are underpaid then HMRC will charge interest.

Payment on Account | Online Account Filing
Dave Jangid | Online Account Filing

Dave Jangid | March 3, 2020

Note: Please note that the content of the above article and the aforementioned information are solely for the purpose of awareness and are informative in nature. The content is designed with intent to ease the understanding while preserving the essence and importance of the compliance rules and shall not be considered as an ultimate replication of the rules. Online Account Filing does not own any responsibility whatsoever for any unpleasant event that may arise due to the misinterpretation of a specific part or whole of the information.
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