As a responsible taxpayer, understanding payments on account is essential. These upfront payments contribute towards your tax liability, including Class 4 National Insurance if you’re self-employed. To help you navigate through this process, we’ve put together a comprehensive guide on payments on account and how they impact your tax obligations.
Payments on account are advance payments made towards your tax liability. If you’re eligible, you must make two payments on account annually, typically due on January 31st and July 31st. These payments are essential for self-employed individuals and those required to pay tax through self-assessment.
Most taxpayers are subject to payments on account, but some exemptions apply. You may not need to make payments on account if your recent Self-Assessment tax bill was below £1,000 or if you’ve already paid over 80% of the previous year’s tax liability. This could be due to tax deductions through PAYE or interest already withheld by your bank.
When making payments on account, you typically pay half of the previous year’s tax bill. This amount is credited towards your estimated tax liability for the current tax year. It’s crucial to remember that any outstanding tax after these payments must be settled by the following year’s January 31st deadline.
You then make a second payment on account of £1,500 on 31 July 2023.
If your tax bill for the 2022 to 2023 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2024.
For some taxpayers, payments on account can be a significant financial burden. If you anticipate a decrease in your tax bill due to changes in employment or self-employed profits, you can request HMRC to reduce your payments on account. However, this may lead to a tax underpayment and potential interest charges. Seeking guidance from your accountant before making changes is strongly advised.
Payments on account are a crucial aspect of tax compliance for self-employed individuals and those subject to self-assessment. By understanding how they work and staying aware of deadlines, you can meet your tax obligations without facing unnecessary penalties or fines. Remember to consider seeking professional advice before requesting any changes to your payments on account to ensure smooth tax management. Stay informed, and you’ll stay in control of your finances.
