With a new tax year underway, our Tax Manager Diane Aldridge provides a straightforward overview of this complex area for UK taxpayers.
What is a payment on account (POA)?
Payments on account are advance payments made by individuals who complete Self-Assessment Tax Returns, to spread payment of their next year’s Income Tax. These individuals can, for example, have a rental property or run a business as a sole-trader and in these instances, income from those activities isn’t taxed at source as it is for employees. The payment on account system is designed to ensure these individuals pay tax on their income on an ongoing basis and prevent them from getting into debt with HM Revenue and Customs (HMRC).
Note that payments on account include Class 4 National Insurance Contributions, but do not include student loan repayments or any Capital Gains Tax you are due to pay.
Who do tax payments on account apply to?
You are required to pay your Income Tax via payments on account if less than 80% of the Income Tax you are due to pay has been deducted at source i.e. through the ‘Pay as Your Earn’ (PAYE) system AND your last Income Tax bill was more than £1,000.
If you are a limited company director, it is likely you receive your income via a combination of salary and dividends. The Income Tax due on your salary will be paid via PAYE, but you are still required to file a self-assessment return to declare your dividends and income received from other sources. You may therefore also be required to make payments on account to pay the tax this form of income attracts.
When do I make my payments on account?
The UK tax year runs from 6 April to 5 April the following year.
HMRC uses your previous year’s tax bill as a guide for what you are likely to need to pay the following year. You pay this amount in two instalments, half on 31 January (during the tax year in question) and half on 31 July (just after the end of the tax year).
What if I overpay the Income Tax I am due to pay for the following year?
If your tax return for the following tax year highlights that you overpaid your Income Tax, you can claim any refund due to you via the Self-Assessment system. HMRC will confirm your overpayment and provide you with options to have the money repaid to you or you can choose to have the amount deducted from your next tax bill.
What if I underpay the Income Tax I am due to pay for the following year?
You will need to add the appropriate outstanding amount to the payment you make the following 31 January. This is called a ‘balancing payment.’
Here’s an example:
Your tax bill for the tax year to 5 April 2022 is £5,000.
You made two payments on account of £2,000 each (on 31 January 2022 and 31 July 2022 – £4,000 in total).
The total tax you need to pay by 31 January 2023 is £3,500, comprising:
- a ‘balancing payment’ of £1,000 for the 2021 to 2022 tax year (£5,000 less POAs of £4,000)
- the first payment on account of £2,500 (half of your 2021 to 2022 tax bill) towards your 2022 to 2023 tax bill
You will then make a second payment on account of £2,500 by midnight on 31 July 2023.
If your tax bill for the 2022 to 2023 tax year is more than £5,000 (the total of your two payments on account), you will also need to make a ‘balancing payment’ to settle the bill by 31 January 2024.
What if I predict my tax bill will lower the following year?
You can apply to HMRC to reduce your payments on account, if, for instance, you know your tax bill will fall the following year due to winding down your business or because you have reached retirement age and will no longer be eligible to pay Class 4 National Insurance.
An important note for the newly self employed
Your first tax bill will be due to be paid on 31 January following the end of your first tax year. You will also be required to begin your payments on account by paying half of your predicted bill for the next tax year on the same date, if your first tax bill is greater than £1,000 and less than 80% of your employment income is taxed via PAYE.
What if I can’t make my tax payments on time?
If you’re finding it difficult to make a tax payment you are encouraged by HMRC to discuss and agree a payment plan in the form of a ‘Time to Pay Arrangement’. It’s always better to discuss your situation with them as these arrangements are agreed with reference to your individual financial circumstances.
My tips for easier payments on account:
- Set aside funds regularly to cover your payments on account.
- Submit your tax return early each year, rather than waiting too close to 31 January. This will provide you with advanced visibility of your tax obligations and provide your accountant with time for tax planning and mitigation on your behalf.
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