If you’re self-employed, a landlord, or earning additional income, you’re likely familiar with the HMRC Self Assessment process. One element that often surprises taxpayers is the “Payments on Account” system. Let’s unpack what this means, why it exists, and how you can manage it efficiently.
What Are Payments on Account?
Payments on Account are advance payments towards your next year’s tax bill. They are required if your tax liability exceeds £1,000 and less than 80% of your income has been taxed at source (e.g., through PAYE). This system ensures that HMRC receives a portion of your tax in advance, helping you spread the financial burden.
How Are They Calculated?
HMRC calculates Payments on Account based on your previous year’s tax bill. They will ask for two instalments, each equivalent to 50% of the tax owed in the prior year. These payments are due on:
- 31st January (alongside any outstanding tax for the prior year)
- 31st July
For example, if your tax bill for the 2023/24 tax year was £5,000, HMRC would require two payments of £2,500 each in January and July 2024.
Adjustments for Overpayments or Underpayments
If your income changes significantly, your Payments on Account might not accurately reflect your liability for the current tax year. Overpayments will be refunded or offset against future bills, while underpayments could result in an additional “balancing payment” due the following January.
To avoid surprises, consider using our tax planning services. At SA Lee Accountancy Ltd, we can review your estimated income and adjust your Payments on Account if necessary, ensuring you pay the right amount.
Managing Payments on Account
Planning ahead is crucial. Here are a few tips:
- Budget Throughout the Year: Set aside a percentage of your earnings for tax to avoid scrambling for funds when deadlines approach.
- Claim Tax Reliefs and Allowances: Make sure you’re claiming all available reliefs to reduce your liability.
- Use Time Wisely: If your business has seasonal income fluctuations, reach out to us to discuss adjusting your payment schedule.
Need Help Navigating Self Assessment?
At SA Lee Accountancy Ltd, we understand that navigating HMRC’s processes can feel overwhelming. Whether it’s calculating your liability, managing Payments on Account, or reviewing your overall tax strategy, we’re here to support you.
Get in touch with us today to take the stress out of tax season and ensure you stay on top of your obligations with confidence.