Payments on Account' are an essential part of the UK's Self Assessment tax system, especially for self-employed individuals and those with varied income sources. This blog post demystifies Payments on Account, helping you manage your tax obligations efficiently.
What are Payments on Account?
Payments on account are essentially advance payments towards your Self Assessment tax bill. They include tax owed on income not collected at source and Class 4 National Insurance if you're self-employed. These payments are made twice a year and are based on your previous year's tax bill.
Who Needs to Make These Payments?
You're required to make payments on account if:
- Your last Self Assessment tax bill was over £1,000.
- You paid less than 80% of that bill was not collected at source (e.g., through your tax code or bank interest deductions)..
How Are They Calculated?
Each payment on account is half of your previous year’s tax bill. For instance, if your tax bill was £2,000, each payment on account would be £1,000.
Payment Deadlines:
The first payment is due by midnight on 31 January, and the second by 31 July each year. It's crucial to meet these deadlines to avoid penalties and interest charges.
Balancing Payment:
If your tax bill turns out to be more than what your payments on account covered, you'll need to make a 'balancing payment' by 31 January next year. This ensures you pay the total tax owed for the current tax year.
Reducing Payments on Account:
If you expect your income to be lower than the previous year, you can apply to HMRC to reduce your Payments on Account. This can prevent you from overpaying tax. However, be cautious as underestimating your income can result in interest charges on underpaid tax.
Handling Overpayments and Underpayments:
If you overpay through your Payments on Account, HMRC will refund the difference. Conversely, if you underpay, you will be charged interest on the unpaid amount.
Example Scenario:
To illustrate, suppose your tax bill for the 2021 to 2022 tax year is £3,000. You would make two payments of £1,500 each towards this bill. If your actual bill for the year is higher, a balancing payment will be needed. Conversely, if it's lower, you might be due a refund or a reduction in your next payments on account.
Conclusion:
Payments on Account are a proactive way to manage your tax liability, helping to spread the cost over the year. Understanding and accurately calculating these payments can significantly ease your financial planning and avoid unexpected tax bills.
For personalized advice on managing your Payments on Account or any other tax-related inquiries, feel free to reach out to our expert team.
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