Payments on Account
Updated: Jan 20, 2021
This is the first of a series of circulars which I’ll send out, looking to address commonly asked questions or topical issues.
I’ll add a link to them on the website for future reference. The first looks at an HMRC initiative which receives a ‘mixed’ response from those using self-assessment for the first time –Payments on Account.
I hope you find them useful.
PAYMENTS ON ACCOUNT
Originally published 6th August 2018
The Payment on account system is often misunderstood and can come as quite a shock when presented for the first time. It is the system by which HMRC collect Income Tax and National Insurance Contributions due from self-assessment. All UK taxpayers who have self-assessment tax liabilities of more than 20% of their total tax bill (when aggregated with PAYE), and whose self-assessment tax liability is more than £1,000 on it’s own, are in scope for Payments on Account.
The way it works is as follows. Rather than HMRC collecting a single tax payment for the full amount due at the 31 Jan following the conclusion of a tax year, HMRC demand 3 instalments. The first instalment is due by the 31 Jan during the tax year itself. The second instalment is due by 31 Jul following the end of the tax year, with a third and final payment due by the 31 Jan 9 months after the conclusion of the tax year.
HMRC apply a working assumption that the next year’s tax bill will be in line with current year. Therefore instalment 1 (31 Jan) is 50% of the previous year’s tax bill, instalment 2 (31 Jul) is the other 50%, with instalment 3 being the balancing payment.
Essentially it is HMRC’s attempt to level the playing field between those individuals paying tax via PAYE, and those paying tax via self-assessment. Individuals who have their tax deducted at source (PAYE), are viewed as being at a disadvantage to those who pay their tax potentially up to 21 months after remuneration. The more accepting among us may view this as an opportunity for taxpayers to settle in instalments (i.e. spreading the burden), with the less accepting amongst us seeing this simply as a down payment.
Let’s demonstrate how it works with a few numbers:
Taking the tax year ending Apr 5 2017 as an example. Let’s say your first tax bill from self-assessment was calculated at £6,000 and you’d paid no tax at source in the period. This amount would be due in full by 31 Jan 2018. In addition to this HMRC would be looking for you to pay the 1st instalment of your 2017/2018 tax bill. Your tax bill at 31 Jan 2018 would be £9,000 (£6,000 + instalment 1 - 50% of £6,000). Your tax bill at 31 Jul 2018 would be £3,000 (instalment 2 - 50% of £6,000).
Let’s say around July 2018 your self-assessment tax return was filed for the tax year ending Apr 5 2018. The tax bill was calculated to be £8,000. Instalment 3 (the balancing payment) due on 31 Jan 19 would therefore be £2,000 (£8,000 minus the 2 payments on account of £3,000).
As was the case in the previous year, HMRC would be looking for their first instalment of the 2018/2019 tax bill on 31 Jan 19, assessed to be in line with what has been reported for the 2017/2018 year. £4,000 (50% of £8,000) would fall due at 31 Jan 2019, £4,000 (the other 50%) would fall due at 31 Jul 2019, with the balancing charge (say £1,000 out of a total £9,000 bill) due by 31 Jan 2020.
Payments on account can be adjusted if you feel they are inaccurate. However, as is usually the case, penalties and interest do become chargeable on late settlement.
Any questions on payments on account please let me know.