Filling out a Self Assessment tax return is never the most exciting of activities, but if you’re self-employed, or you meet certain criteria, it’s something you have to do. What’s more, paying out large amounts of tax twice a year isn’t all that fun either. Yes, you didn’t misread that. Twice a year.
Why twice? Because when you submit a Self Assessment tax return, you also have to pay something called Payment on Account. So, what is it? Let’s find out.
What is Payment on Account?
Payment on Account is a tax payment made twice a year as part of the Self Assessment process. It’s designed to help you spread the cost of your tax bill, and is calculated by looking at the previous year’s bill.
You only need to make Payment on Account if less than 80% of your income has tax deducted at source, and if your Self Assessment tax bill is more than £1,000. It’s due in two instalments, one on the 31st of January, and one on the 31st of July every year.
If your tax bill was more than the previous year, you will have to make a balancing payment. If your tax bill was lower, you will receive a refund from HMRC.
Many people find this difficult to plan for in the first year of self-employment, as they’ll have a full tax bill plus a Payment on Account, but ultimately, it’s there to help you with your cash flow, and to stop you from being constantly indebted to HMRC.
How do I make a Payment on Account?
You can check if you have an outstanding Payment on Account by logging into your online HMRC account and checking your Self Assessment statement. There, you’ll be able to see payments you’ve already made, and payments you will need to make towards your next tax bill.
Can I adjust my Payment on Account?
Payment on Account is calculated based on your tax bill for the previous year. Your self-employed earnings can – and often do – fluctuate from year to year and, as a result, so too will your tax.
HMRC will assume your earnings will be the same every year, and so will not change your Payment on Account. However, you can change your Payment on Account by contacting HMRC or asking your accountant to help you with this.
Note: You should be aware that, should you reduce your payments, HMRC will add extra interest and may also apply penalties (see below).
Penalties on payments
If you weren’t aware that you had to make a Payment on Account, or if you haven’t been able to get together enough money to make the payments, there can unfortunately be penalties. On an outstanding amount, there will be interest added until you are able to pay. Similarly, if you reduce your Payment on Account too far, HMRC will also add interest to the difference.
At the moment HMRC is charging 3% on outstanding balances. If you have missed a payment, you can use HMRC’s online calculator to work out how much interest will have been added.
If you need some guidance with your Self Assessment or with Payment on Account, our tax team is here to help! Contact us for a free consultation.