Seen the term payment on account and wondered what it means? Had a notification you’ve got to pay a payment on account but aren’t actually that sure what it means? Keep reading to find out what they actually are!
Payments on account apply to the self employed. They’re effectively advance payments for your self assessment tax return bill – once you hit a threshold (currently £1,000) you’ll have to make advance payments rather than just paying by the end of January the year after.
For example, your tax return for 2021-2022 will have it’s payments on account made by 31 January 2022 & 31 July 2022. The payments are based on your previous tax return, so if you owed £6,000 tax in 2020-2021 then your payments on account will be £3,000 for each payment.
This means it’s another reason to not leave your tax return until the last minute, especially if you’re not already making payments on account. This is because when you cross the threshold for making payments on account you’ll effectively have to pay 150% of your tax bill by 31st January as you’ll be paying the current year in full as well as your first payment on account of 50% of that tax bill – ouch!
It’s almost certain that once you submit your tax return for the year your tax bill will not match what tax you’ve paid. If it’s lower than the payments on account you’ve made then you’ll be owed a refund, if it’s higher you’ll have a balancing payment to make by the following January (so 9 months after the end of the tax year). That’s also when the first payment on account will be made for the following year, based on that tax return.
If you know your income has gone down, as many peoples will have done recently due to COVID, then you can apply to HMRC to reduce your payments on account, even as far as reducing them to nothing. You can do this online or by filling in a form – more info on reducing payments on account here.