Understanding HMRC Payments on Account
Understanding HMRC Payments on Account: What You Need to Know
If you’re self-employed or receive untaxed income, you may already be familiar with the concept of Payments on Account. But for many, it can still be a confusing part of managing your taxes. In this post, we’ll explain how Payments on Account work, who needs to pay them, and how to make sure you’re on top of your tax obligations.
What Are Payments on Account?
Payments on Account are advance payments towards your Income Tax bill for the following year. HMRC asks for these payments if your annual tax bill is more than £1,000 and you don’t pay the majority of your tax at source (like through PAYE). These payments are designed to help spread the cost of your tax bill and prevent you from having to make a large one-off payment when you file your tax return.
Who Needs to Make Payments on Account?
You’ll be required to make Payments on Account if:
- Your tax bill for the previous tax year was more than £1,000, and
- Less than 80% of your income tax was collected at source (e.g., through PAYE).
This generally applies to self-employed individuals, landlords, or those with significant income from investments or other sources that haven’t been taxed directly.
How Are Payments on Account Calculated?
HMRC bases your Payments on Account on your previous year’s tax bill. You will be asked to pay two instalments, each worth 50% of your last year’s tax bill. These payments are due halfway through the year and are credited towards your upcoming tax return.
For example, if your tax bill for the 2022/23 tax year was £4,000, HMRC will request:
- A payment of £2,000 by 31 January 2024.
- Another payment of £2,000 by 31 July 2024.
What Happens When the Year Ends?
Once you submit your tax return for the current year, you’ll know your exact tax bill. If you’ve paid too much via your Payments on Account, HMRC will either:
- Issue a refund, or
- Adjust your payments for the next year.
If your tax liability is higher than your Payments on Account, you’ll need to pay the outstanding balance, known as the balancing payment, by 31 January of the following year.
Example: How It Works
Let’s say your tax bill for 2023/24 is £5,000:
- You’ll have made Payments on Account of £2,500 in January and £2,500 in July.
- If your actual bill comes out to £6,000, you’ll owe a balancing payment of £1,000, due by 31 January 2025.
- Alternatively, if your bill comes out to just £4,500, HMRC will reduce the payments on your next tax return or offer you a refund.
Can I Reduce My Payments on Account?
If you expect your income (and thus your tax bill) to be lower in the coming year, you can ask HMRC to reduce your Payments on Account. To do this, you can:
- Log into your HMRC online account and select the option to reduce your payments, or
- Submit form SA303.
Important: Reducing Payments on Account is an option, but if you lower them too much and end up underpaying, HMRC may charge interest on the difference.
Key Deadlines to Remember
- 31 January: First payment on account is due (for the upcoming tax year) along with any balancing payment from the previous year.
- 31 July: Second payment on account is due.
Managing Payments on Account
Payments on Account can sometimes come as a surprise to taxpayers who don’t expect to owe as much in advance. It’s important to plan ahead and ensure you have enough funds available to meet both instalments.
If you’re unsure about your payments or want to discuss how this affects your specific circumstances, feel free to get in touch with us. We can help you estimate your tax liabilities and ensure you’re making the right payments at the right time.
