Uncovering payments on account.

Payments on account - you may have heard of them before, although we find that they take our newly self employed clients by surprise. “So, I’m paying my tax twice? On income I haven’t even earned yet?” are the questions we’re asked the most. We promise that by the end of this article, you’ll be feeling much more confident around payments on account and may actually feel thankful for them.

So, what exactly are payments on account?

To put it simply, payments on account (POA’s) are a self employed person’s way of making payments towards their tax liability in advance. Think of a time that you were employed and earning a salary - you’ll probably remember your employer automatically deducting the tax you owed each month and paying it to HMRC on your behalf.

Well, for self employed people it’s different - unlike being employed, self employed people report their earnings and pay tax to HMRC just once per year, for the entire year. As you can probably imagine, it can be quite easy for people (especially those who are newly self employed) to get to the end of the tax year and realise that they have a huge tax bill which they haven’t made any savings towards. The point of payments on account is to combat this.

When do I need to make them?

You will need to make payments on account each year, unless:

Your previous tax bill was less than £1,000
You paid more than 80% of your previous year's tax owed already, e.g. through PAYE

How are they calculated?

Payments on account are calculated based on your previous year’s earnings. This is because there is an expectation that your income should stay roughly the same year on year (more on this later).

There will always be two payments on account to make, and each payment will be 50% of your previous tax liability. For example:

Let’s say your tax liability for 2021/22 was £4,000 - your payments on account for 2022/23 will be £2,000 each - an overall total of £4,000.

When do I need to make the payments?

The payment deadlines are always the same each year, with your first payment on account falling due on 31st January, and your second being due by 31st July.

But what if my tax bill is less in the following year?

Not a problem - if your tax bill ends up being less than you expected in the following year meaning that the payments on account made were actually too high, you’ll get the money back.

And what if my tax bill is higher in the following year?

This is very common and you will essentially need to pay the difference - this is known as a ‘balancing payment’.

When you may be eligible to reduce next year’s POA’s...

You may be able to put in a claim to reduce your payments on account if you are expecting next year’s income to decrease. Tread lightly though, as doing this incorrectly can land you in hot water with HMRC. Your accountant will be able to correctly calculate a reduced figure for you and we recommend that you leave this with them.

Final thoughts.

Hopefully this blog post has answered all your questions about payments on account and made you realise that they are not as daunting as you thought. Payments on account are there to help you keep on top of your tax bill and are not to be feared!

Contact our experts today if you need help with your self assessment.