Payments on account are essentially advance payments towards the following year’s tax liability, but not every taxpayer has to make a payment on account – they are only due if your liability is £1,000 or more (but if more than 80% of your tax liability is deducted at source, e.g. via employment, they are not due). The payments are due in two instalments, each at 50% of the preceding year’s tax liability.
Here’s how the payment on account system works in practice:
Tax liability for year ended 5th April 2019: £950
Amount due to pay in January 2020: £950 (no payments on account due for 19/ 20, as liability is less than £1,000)
Tax liability for year ended 5th April 2020: £1,000
Amount due to pay in January 2021: £1,500 (being £1,000 liability, plus £500 first payment on account for 20/ 21)
Amount due to pay in July 2021: £500 (second payment on account for 20/ 21)
Tax liability for year ended 5th April 2021: £1,500
Amount due to pay in January 2022: £1,250 (being £1,500 liability for 20/ 21, less 2 x payments on account of £500 each, plus £750 first payment on account towards the following tax year 21/ 22)
Amount due to pay in July 2022: £750
Tax liability for year ended 5th April 2022: £500
Refund due to taxpayer: £1,000 (being the two payments on account of £750 each made in January/ July 2022, less £500 actual tax liability)
Amount due to pay in January 2023: £nil (liability for year already settled, and no payments on account due)
Amount due to pay in July 2023: £nil
Some things don’t affect the payments on account, for example, Class 2 National Insurance, student loan repayments, and Capital Gains Tax due in one tax year would not increase the payments on account for the following tax year.
We always let you know the payments on account due when preparing your personal tax return, but if you have payments on account to make, and you think your liability will be less, for example due to reduced sales or investing in new plant and machinery for your business, or if you are a higher-rate taxpayer making additional pension contributions, we can help you to advise HMRC in advance, and revise the payments to a suitable amount.
We can do this when preparing your tax return, or after you have already made your first, or even second, payment on account, which may result in a refund. It’s important to get the calculations right though – reduce them too much, and HMRC will charge late payment interest. Speak to our Tax Manager Kayleigh Tipper for assistance.