When you submit your personal self-assessment tax return, you may be asked by HMRC to make payments on account. This can be slightly confusing as you are being hit with your tax bill and then being asked to pay additional money on tax you haven’t declared yet.
You will be asked to make a payment on account if the amount of tax you have to pay HMRC for the year you are submitting is over £1,000 and comprises more than 80% of your total tax bill.
That is, if at least 20% of the amount of tax you have to pay for the year is taxed at source then you will not need to make payments on account. Generally income that is taxed at source will be that which comes from an employer through PAYE, although there are other less frequent examples.
Your tax bill is due on the 31st of January following the end of the tax year. Your payments on account if due will be split into 2, with one half also on the 31st of January and then the second on the 31st of July.
Let’s take a simple example. Your tax bill for the year that has just ended on the 5th of April 2020 will be due on 31st January 2021. If you have earned this entirely through self-employment, then none of it will have been taxed at source.
If you have a bill of £5,000 then this will be due on 31st January 2021. You will have to make payments on account towards your tax bill for the 2020/21 tax year (that which ends 5th April 2021). These will be split into two payments of £2,500 due on 31 Jan 2021 and 31 July 2021.
You will therefore be due to make the following payments to HMRC:
|Tax bill for 2019/20||£5,000|
|1st Payment on Account for 2020/21||£2,500|
|Total due on 31 January 2021||£7,500|
|2nd Payment on Account for 2020/21||£2,500|
|Total due on 31 July 2021||£2,500|
This means that when your return for 2020/21 is completed, you will have already paid £5,000 towards it. So if your tax bill for the following year turns out to be £6,000 you will need to pay £1,000 (the difference between your tax bill and what you have already paid) and then your payments on account of £3,000 at the end of January and July the following year as can be seen in the diagram below.
|Tax bill for 2020/21||£6,000|
|Less payments on account (31 Jan 2021 and 31 Jul 2021)||(£5,000)|
|1st payment on account for 2021/22||£3,000|
|Total due on 31 January 2022||£4,000|
|2nd payment on account for 2021/22||£3,000|
|Total due on 31 July 2022||£3,000|
It is possible that if your tax bill is less than the previous year, you may be due a rebate although that will obviously depend on your situation.
You can also request to reduce the payments on account. You will need to provide a justification for this (e.g. you are intending to change from being self-employed to being employed) and make an estimate of what your tax bill will be. You should only do this if you genuinely think that your liability will reduce because HMRC do have the option to charge you interest on the difference between what you paid and what you should have paid.
You will never be asked to increase payments on account if you think that your tax bill for the following year will be larger.