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20 Oct

A Guide to Self Assessment: Payments on Account

Following the COVID-19 pandemic, and the shutdown of many industries throughout the numerous national and regional lockdowns, you may have sought additional income through the means of a side-business, and, if you earned more than £1,000 from your side business, you will therefore be required to submit a Self-Assessment Return for the tax year ending 5th April 2021.

What are payments on account?

As the deadline for Self-Assessment approaches for the 2020/21 tax returns, it’s important to have a full understanding of what you may be required to pay. You are required to make ‘payments on account’ if you are a UK taxpayer, who pays less than 80% of your income tax at source, and your overall tax bill for the years is over £1,000. Payments on account are advanced payments towards your following year’s income tax bill. The amount that you have to make for each payment on account is equal to half of your previous year’s tax bill. So, if your tax bill for the 2020/21 tax year is £2,000, then you would need to make two payments on account of £1,000 (totalling £2,000) toward the 2021/22 tax bill.

When do you make payments on account?

Payments on account are due on the 31st January during the tax year, and the 31st July after the end of the year. For instance, you will be required to make payments on the 31st January 2022 and 31st July 2022 towards your income tax for the 2021/22 tax year, based upon your earnings for the 2020/21 tax year, despite the fact that your Self-Assessment Return will not be due until 31st January 2023 for the 2021/22 tax year. If the payments on account you make are greater than the next tax bill you have, the difference will be refunded, either via a bank transfer/cheque or by deducting the refund from your next tax bill.

A man working on his tax returns

Can I reduce my payments on account?

You may be aware in advance of preparing your following year’s tax return that your tax bill will be lower. This could be for numerous reasons, the most common examples being retirement, a significant increase in business expenses (perhaps a purchase of a new piece of equipment) or the loss of a contract thus reducing your income. If this is the case, you can apply to HMRC to reduce your payments on account via your Self-Assessment Return. To do this, you will need a strong estimation of the following year’s tax bill. Be aware however, if you do reduce your payments on account by too much, HMRC will charge you interest for underpaying your tax.

What if my payments on account don’t cover my entire tax bill?

When you come to complete your tax return for the 2021/22 tax year, you may discover that the tax bill is actually higher than the 2020/21 bill. If this is the case, you will need to make an additional payment, referred to as a ‘balancing payment’ to pay this in full.

For example, on 31st January and 31st July 2022 you made payments on account of £1,000 – totalling £2,000 – towards your 2021/22 tax bill, due 31st January 2023. However, once completing the return for 2021/22 you discover that your tax bill is actually £2,200. You will be required to make a ‘balancing payment’ of £200 by 31st January 2023. In addition to this, as your tax bill is over £1,000 – you would be required to make payments on account in January and July 2023 towards the 2022/23 tax bill.

What if I am making payments on account for the first time?

As I mentioned earlier in this article, if you began trading during the 2020/21 tax year and you calculate that you have a tax bill of £2,000 and you had no tax deducted during the year at source, your payment of £2,000 will be due for payment on 31st January 2022. However, as your tax bill is over £1,000, you would also have to make your 1st payment on account (£1,000 – half of your tax bill) by 31st January 2022. This would result in a payment of £3,000 due to HMRC by 31st January 2022.

If you are making payments on account for the first time, be it your first year of trading, or it is the first time your tax bill exceeds £1,000, the addition of the payments on account onto your balancing payment can be an unwelcomed surprise, and may catch you off guard.

We encourage all of our clients to complete their returns in plenty of time for the deadline, and this is a strong reason as to why you should endeavour to get your tax return completed as early as possible – allowing you time to save before the payment deadlines.

If you would like to know more about Self-Assessment, then the easiest way to do it is to go to our website and take it from there!

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