This blog post was first published on 5 December 2009 and was last updated on 27 November 2014.
Are you a UK taxpayer? Is less than 80% of your income tax paid at source*? In that case, you may well be told by HMRC to make "payments on account". Here we explain what payments on account are, when you need to pay them, and what to expect when making payments on account for the first time.
What payments on account are
Payments on account are payments towards your next year's income tax. The amount you have to pay for each payment on account is half of your previous year's tax bill. So if your tax bill for 2013/14 was £1,500 (you only have to make payments on account if your tax bill is over £1,000), then each payment on account would be £750.
Making payments on account
Payments on account are due on 31st January during the tax year, and 31st July soon after its end. On 31st January 2015 and 31st July 2015, for example, you may be told to make payments on account towards the tax that you're going to have to pay on your income for the tax year 2014/15.
If you pay too much, HMRC will give you the difference back, either via cheque or bank transfer, or by deducting the difference from your next tax bill.
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You may know in advance that you will pay too much on account, because your tax bill next year will be lower. This could be because you’re winding your business down, for example, or because you’re passing retirement age and will no longer have to pay class 4 National Insurance. If this is the case, you can apply to HMRC to reduce your payments on account.
Be warned though: if you reduce your payments on account too far, HMRC will charge you interest and penalties for underpaying your tax.
On the other hand, when you come to complete your tax return, it might transpire that this year's tax bill is actually higher than last year's, and you owe more than you’ve already paid. If this is the case, you’ll need to make a “balancing payment” to HRMC by 31st January of the following tax year.
If you paid £1,500 on account for 2014/15, for example, and you find that you’re actually due to pay £1,700 when you come to do your tax return, you’d pay a “balancing payment” of £200 to HMRC by 31st January 2016.
Your two payments on account for 2015/16 would each be half of £1,700 (the previous year’s tax bill). You’d need to pay £850 (plus the balancing payment of £200) on 31st January 2016, and then £850 on 31st July 2016.
Making payments on account for the first time
When you make payments on account for the first time, it might be your first year of trading or the first time your tax bill has been over £1,000 in a tax year. Either way, it’s important to know what to expect.
Let's say you began trading in 2014/15 and have a tax bill of £1,400 for that year, and you didn't have any tax deducted at source. That tax bill would be due for payment on 31st January 2016. However, because your tax bill is over £1,000, you’d also have to make your first payment on account (£700, half the prior year’s tax bill) for 2014/15 by 31st January 2016 - in addition to your tax bill. This means that you’d owe £2,100 to HMRC on 31st January 2016 - ouch!.
This can come as an unpleasant surprise, and it’s 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!
*Income tax ‘paid at source’ is deducted from your income before you receive it (e.g. when tax is deducted from your salary under PAYE).