Every year we get calls from clients asking how payments on account for self-assessment work. We’ve decided to do a short blog to try and make things a bit clearer.
Do I need to pay HMRC a payment on account for self-assessment?
If your tax bill exceeds £1,000, HMRC also ask you to pay in advance for the next tax year. The payments are calculated at 50% of your tax bill and are due by 31 January and 31 July each year. In effect, by the time your next tax bill comes along, you will have paid the same amount that was due the year before in advance.
Confusing, we know! Here’s an example:
- Tax liability for 2019-20 = £2,000, to be paid by 31 January 2021.
- Also due by 31 January 2021 is a 50% payment on account for 2020-21 (£1,000).
- The total due on 31 January 2021 is therefore £3,000.
- A second payment on account of £1,000 (again 50% of the 2019-20 figure) is due on 31 July 2021.
£2,000 is paid in advance for the 2020-21 tax year.
Will my payments on account increase if my income increases?
If your income for 2020-21 is higher, this may result in a higher tax bill and the £2,000 paid in advance would not be enough to cover the tax due.
- Tax liability for the 2020-21 tax year = £2,500.
- £2,000 has been paid on account already (see above).
- Therefore, an additional payment of £500 is owed to HMRC.
- Also due by 31 Jan 2022 is a 50% payment on account for 2021-22: £2,500 x 50% = £1,250.
The total due by 31 Jan 2022 is therefore £1,750.
- A second payment on account for 2021-22 of £1,250 is due by 31 July 2022.
£2,500 is paid in advance for the 2021-22 tax year.
Can I reduce my payment on account for self-assessment?
If, on the other hand, your income for 2020-21 was lower, a tax refund would be due.
- Tax liability for the 2020-21 tax year = £1,500
- £2,000 paid on account already. Therefore, there’s been a overpayment of £500.
- A payment on account for 2021-22 is still due (£1,500 x 50% = £750). Total due to pay by 31 January 2022 = £250 (£750 less the £500 refund).
- Second payment on account for the 2021-22 year = £750. This is due by 31 July 2020.
£1,500 is paid in advance for 2021-22.
We try to complete accounts as soon after your year end as possible, so that we can give you your tax liabilities well in advance of when they are due. This enables us to reduce the payments on account in advance if needed.