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The UK’s self-assessment tax system introduces a multitude of components and procedures that taxpayers need to navigate. One such element is the concept of “Payments on Account” – a system that can often lead to confusion or misunderstanding. This article aims to demystify Payments on Account, discussing what they are, why they exist, and how they influence your tax liabilities.
Understanding Payments on Account
In the UK’s tax system, Payments on Account are advance payments towards your next year’s tax bill. They’re calculated based on your previous year’s tax bill and are split into two equal instalments.
This system applies to those in the self-assessment tax scheme, primarily the self-employed, whose previous tax bill was over £1,000 and where less than 80% of their tax was collected at source (like PAYE).
The Rationale Behind Payments on Account
The main purpose of Payments on Account is to ensure a continuous flow of income for the government throughout the year. It also aids taxpayers by spreading out their tax payments over the year, rather than facing a single large payment.
Calculating Payments on Account
Payments on Account are based on your tax bill for the previous year. Each payment is typically 50% of the previous year’s self-assessment tax bill (which includes both Income Tax and Class 4 National Insurance Contributions).
When are Payments on Account Due?
Two Payments on Account are due each year. The first payment is due by midnight on 31st January during the tax year. This is the same day the balance of your previous year’s tax bill is due. The second payment is due by midnight on 31st July following the end of the tax year.
Reconciling Payments on Account
The total of your Payments on Account is applied against your tax bill for the following year. If your Payments on Account exceed your actual tax liability, the surplus will be refunded or can be applied towards your next tax bill. If your Payments on Account are less than your actual tax liability, you will need to make a ‘balancing payment’ by 31st January following the end of the tax year.
Reducing Payments on Account
If you know that your income for the upcoming year will be less than the previous year, you can apply to HMRC to reduce your Payments on Account. This can be done via your online tax account or through form SA303. Be cautious, though; if you reduce your payments too much, you could end up owing interest on the difference.
Final Thoughts
While the concept of Payments on Account may seem complex at first glance, understanding it is integral to managing your tax liabilities effectively. It’s a proactive way to stay on top of your tax payments and avoid any unwelcome surprises at the end of the tax year.
Bear in mind that if you are unsure about any aspect of your tax affairs, it’s always a good idea to seek professional advice. A qualified tax adviser can help you understand and meet your tax obligations and potentially save you a significant amount of time, stress, and money.