Payments on Account

Payments on Account:

What You Need to Know Before You Switch Off

As summer rolls in and thoughts turn to out-of-office replies, sandy beaches, and well-deserved breaks, there is one date that tends to sneak onto the calendar: 31 July. Nothing quite says relaxation like a reminder that the second payment on account is due. It has a knack for sneaking up just as you are browsing beach reads or queuing for airport security.

So, before you fully switch off for summer, it is worth taking a moment to understand what payments on account are and how to make sure they don’t come as an unwelcome surprise while poolside.

What are payments on account?

Payments on account are advance payments towards your next tax bill. They are designed to spread the cost of your tax bill over the year (in two instalments), rather than paying it all at once.

They are required where the total Self-Assessment liability for the preceding year was more than £1,000 (and where less than 80% of this liability was met by deduction of tax at source e.g. PAYE).

How are the payments calculated?

Each payment on account is based on estimated earnings for the following year.  This will usually reflect 50% of the previous year’s Self-Assessment liability.

Where a taxpayer is making payment on accounts for the first time they will likely have to pay one and a half times their tax bill.  This can come as quite a shock to some and adequate tax provisioning should be considered.

When are they due?

The first payment on account is due on 31 January within the tax year it applies to, and the second is due on 31 July following the end of that tax year. Any balancing payment is then due on 31 January after the tax year ends, alongside the first payment on account for the next tax year (if applicable).

Example:

Interest and penalties

If payments on account are made late, HMRC will charge interest on any overdue tax.  The interest will run from the due date of the payment until the date of actual payment. The late payment interest rate at the time of this article is 8.25%.

Reducing payments

We are able to make a claim to reduce payment on accounts if you expect your tax liability to be less than the previous year. However, where a taxpayer ‘over-reduces’ payments on account, HMRC will charge interest, and possibly penalties if they believe the claim was unreasonable.

Final Thought: Don’t Let Tax Cast Shade on Your Summer

While nobody wants to think about HMRC while applying sun cream, a little planning now can save a lot of stress later. Whether you are making your first payment on account or wondering if you can reduce it, understanding the rules—and your own tax position—can help you avoid you getting burnt.

If in doubt, speak to your advisor before switching on your out-of-office. Then you can relax, safe in the knowledge that the only thing compounding over summer will be your tan—not interest.

If you need advice on any tax-related area, please email tax@thomsoncooper.com for a free initial consultation.