You might have received a statement from HMRC in the past few weeks reminding you that your payment on account is due by 31st July. I’m here to shed light on what a payment on account is so you can have confidence in your business finances. With the July 31 deadline approaching, it’s important to understand what payments on account are and who they apply to.
What on earth are payments on account?
When you’re self-employed, HMRC may require you to make payments on account towards your future tax bill. These payments act as an advance payment for your tax bill for the following year and help you spread the cost over the year. They are calculated based on your previous year’s tax bill.
Who needs to make payments on account?
If your tax bill exceeds £1,000 and less than 80% of your tax liability is covered through tax deductions at source (e.g, through PAYE employed income), you’re likely to be required to make payments on account. For example, if your 22/23 tax bill was £1,200 then you would have had a payment on account of £600 in both January and July, going towards the tax for 23/24. You just might not have noticed the January one as it would have been paid along with the tax for 22/23. The first time you’re required to make a payment on account can come as a shock as you effectively need to pay 150% of your tax bill in one go, so it’s essential to understand your tax position during the year, and be saving for that as you go. And if you have no idea how to do that, then we can help!
Why do payments on account exist?
Firstly, don’t shoot the messenger, or your accountant! Payments on account are HMRC’s attempt at being helpful. Asking you for money upfront might not seem to be that helpful at first glance, but if they didn’t exist you’d effectively be saving for last year’s tax from this year’s income. Without payments on account you’d never be able to stop working! They are an advance payment which sit on your tax account towards the following year. Those in employment also pay their tax liability upfront, in monthly instalments, but of course it feels so much worse when you’re actually paying money over rather than it being deducted before it ever gets to you!
I don’t want to pay these – can I get out of it?
You can’t just avoid payments on account purely because you don’t agree with them or just don’t want to pay them. However, if you have good reason to believe that your income will be lower next year, you can ask HMRC to reduce your payments on account. This can be done either through your online personal tax account or using form SA303. You should be careful when reducing your payments, so make sure you read the HMRC guidance on this first. Do it with caution because if it turns out your profits are not lower then you will be charged interest on the payment on account you should have made! If you are a client of ours then we will be discussing this with you anyway and will do it on your behalf, if it is appropriate.
How do I pay my payment on account?
You can pay your payment on account through your Government Gateway (HMRC online account). The amount you need to pay will be showing on there. You can also find the amount on your previous year’s tax return; for July 2024 it will be noted on your 22/23 tax return.
If you need help with getting to grips with payments on account then just email me direct on karen@kennedyaccountancy.com.
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