So you’ve just about got your head around Self Assessment when you hear whispers of another kind of tax bill due in January: payments on account.
What are payments on account?
Payments on account are advance payments towards future tax bills that are based on your previous tax bills. There are two payments on account due each year - one due on 31st January and one due on 31st July.
What’s the point of payments on account?
HMRC designed them to help taxpayers spread the cost of the following year’s tax bill by making predicted advance payments the year before that tax bill is due. Unfortunately, if it’s your first time making a payment on account, it might sting a little. Without having a previous year’s payment on account to pay off some of your tax bill, you’ll need to make a large payment.
Does everyone need to make payments on account?
The short answer is yes - most established small businesses and full-time freelancers will need to make payments on account. There are two exceptions:
- If your last Self Assessment tax return bill was less than £1,000
- If you’ve paid more than 80% of the tax you owe ‘at source’. Tax paid at source means that a third party, such as your employer, collects the tax and pays it to HMRC for you, without you ever coming into contact with that money. If you’re self-employed it’s likely that you won’t be paying much of your tax at source.
It’s also worth noting that if you’re eligible for payments on account, you can’t opt out of them; they are mandatory payments.
How are payments on account amounts calculated?
While payments on account (POA) can be a little tricky to understand, the method for calculating them is actually fairly simple:
Current year’s tax bill total ÷ 2 = POA amount
You’ll need to make this payment twice each year, which means that you’ll essentially end up paying your previous year’s tax bill amount as a down payment towards your next tax bill.
When are payments on account due?
You’ll need to pay your first payment on account at the same time that you pay your Self Assessment tax return: by January 31st. The second payment is due by July 31st. Here’s an example of how your payment on account could work over a couple of years:
|2018/19 Self Assessment tax return bill = £2,000|
|First payment on account for 2019/20 = £1,000|
|Second payment on account for 2019/20 = £1,000|
|2019/20 Self Assessment tax return bill = £2,500 (but £2,000 of this has already been paid, so there's only a 'balancing payment' of £500 left to pay on this bill!)|
|First payment on account for 2020/21 = £1,250|
|Second payment on account for 2020/21 = £1,250|
How can I make payments on account?
If you use FreeAgent, your very own personal Tax Timeline will always show you exactly when your payments on account are due, as well as how much you owe.
Whether you use FreeAgent or not, you’ll need to sign in to your online HMRC account to pay your POA bill.
Is there a late payment penalty for payments on account?
If you pay a payment on account more than 30 days after its deadline, you’ll automatically receive a late payment penalty of 5% of the unpaid tax amount. You’ll receive another 5% penalty after five months and again at eleven months if the tax is still unpaid at these times.
Getting into the swing of things!
We won’t sugarcoat it, the first year of making payments on account can be a bit painful. As well as having to pay with your first ever Self Assessment tax bill, you’ll need to make your first ‘down payment’ on next year’s bill at the same time. Once you get over the initial learning curve, you’ll hopefully start to get into the routine of these mandatory payments - even if you never become particularly fond of them!
FreeAgent can help take some of the sting out of payments on account with its personalised Tax Timeline and a whole host of other features designed to help you take the stress out of Self Assessment and much more. Try a 30-day free trial to find out for yourself.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.