Self Assessment: Payments on account

Are you a UK taxpayer? Is less than 80% of your income tax paid at source (i.e. taken off before you get the money - as it is with your salary when tax is deducted under PAYE, or with most bank accounts)? You may well be told by HM Revenue to make "payments on account".

What on earth are those? How are they worked out, and when are they due?

What they are

Briefly, they're payments towards your next year's income tax.

So on 31st January 2010 and 31st July 2010, you may be told to make payments on account towards the tax you're going to have to pay on your income for the tax year 2009/10.

How they're worked out

Half the previous year's tax bill for each payment.

So if your tax bill for 2008/09 was £1,500 (you only have to make payments on account if your tax bill is over £1,000 now - that used to be £500 but for 2008/09 and later years it's £1,000), then each payment on account would be £750.

When they are due

31st January during the tax year, and 31st July soon after its end.

What if I pay too much on account?

HM Revenue will give you the difference back. They'll either do this by cheque or bank transfer, or by deducting the difference from your next tax bill.

If you know in advance that you're going to pay too much on account because you know your tax bill will be lower next year, perhaps because you're winding down your business and your income will drop, or you're passing retirement age and no longer have to pay class 4 National Insurance, then you can apply to HM Revenue to reduce your payments on account.

Click here to find the form to do this.

Be warned though, if you reduce your payments on account too far HM Revenue will charge you interest and penalties for underpaying your tax.

What if I don't pay enough on account? I haven't reduced them

So taking the above example, you've paid £1,500 on account for 2009/10.

Let's say when you come to do your tax return, you find you're actually due to pay £1,700.

Don't worry, all you'd do is to pay the difference to HM Revenue by the following 31st January, so that would be a payment of £200 by 31st January 2011. HM Revenue call this a "balancing payment".

Then of course you'd have to make your payments on account for 2010/11 - half of £1,700 each, so £850 each on 31st January 2011 and 31st July 2011.

So you'd pay a total of £1,050 on 31st January 2011.

When they're really nasty

The first year you have to pay them.

This may either be your first year of trading, or the first time your tax bill has gone over £1,000 in a tax year. But then, you'll be paying effectively 1 and a half year's worth of tax on 31st January.

So let's say you began trading in 2008/09 and have a tax bill of £1,400 for that year, and didn't have any tax deducted at source.

That tax bill'd be due for payment on 31st January 2010.

BUT... on 31st January 2010, because your tax bill is over £1,000 you'd also have to make your first payment on account for 2009/10. That's half the prior year's tax bill - £700.

So on 31st January 2010, instead of £1,400, you'll be paying £2,100! Ouch!!

This is one reason why it's a good idea to do your tax return as early as possible so you have time to put money aside!