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.
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:
- Balancing payment for tax year 2018-19 = £2,000 - £1,200 = £800
- 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.
