If you run a business or you’re self-employed, it’s highly likely that you’re eager to reduce payments on account.
When you submit a tax return, HMRC will provide you with a tax bill, which outlines how much you owe and when you need to pay.
Payments on account are designed to enable UK taxpayers to settle outstanding bills in two instalments, rather than making a single payment.
If you’re keen to know more about payments on account, or you’re looking to reduce payments on account with your HMRC tax return, hopefully, you’ll find this article helpful.
What is payment on account?
Payment on account is a system offered by HMRC to enable business owners or self-employed individuals to pay their tax bill in two instalments.
The idea is to spread the cost of paying tax, so that you don’t have a sizeable lump sum to pay either in January or July, depending on whether you file your tax return via post or online.
Rather than paying one bill, you split the bill, and pay instalments in July and January.
If you’re submitting your tax return online, your first payment will be due on the 31st January, with the second instalment due on the 31st July.
Payment on account applies to UK taxpayers in cases where less than 80% of your individual or business income is deducted before you get paid (this is known as deducted at source).
How does payment on account work?
Payment on account may seem fairly simple, but if you delve a little deeper, it can become slightly more confusing.
If you submit your tax return on or before the 31st January, which is the deadline for online self-assessment, your first payment deadline will be the 31st January.
The value of this payment will be calculated according to your tax return for the previous year, for example, a return submitted in January 2017 will relate to the tax year April 2015-April 2016.
You will be charged 50% of your tax bill for that period of time, and the remaining 50% will be due on the 31st July.
If you had a bill worth £10,000, for example, you would pay £5,000 on 31st January and £5,000 in July.
This part of the process is straightforward, but unfortunately, it can get more complicated.
This is because you also have to bear your balancing payment in mind.
The balancing payment takes the following tax year into consideration.
If your tax bill is higher for 2016/2017, for example, you’ll need to factor in the balancing payment.
In this case, the payment will be due on the 31st January 2018.
Payment on account exceptions
Payment on account exception include:
- People who have a tax bill of less than £1,000
- Individuals who have already paid at least 80% of their tax bill, for example, through a tax code
What happens if your tax bill is higher or lower than the previous year?
On the surface, payment on account can seem like a beneficial system.
But the process can become more complex and potentially problematic if there are fluctuations in your earnings.
If you turnover big numbers one year, and then your income drops substantially, you might find it helpful to reduce your payment on account.
This can work for those who are certain that their tax bill will be lower the following year.
But it’s crucial to be aware that there are penalties and fines in place for those who underpay.
It’s unwise to reduce your payments on account if the amount of tax you owe is likely to be similar to, or even higher than the previous year.
Putting money aside for tax
Paying tax often involves making one or two substantial payments per year.
To avoid any last-minute panics or gaps in funding, it’s advisable to put money aside on a regular basis.
Once you’ve come to the end of the tax year, you can access your bill through the HMRC online portal.
This bill will give you confirmation of the sums you need to find before the 31st January and the 31st July.
If you can put money aside every month, for example, this will help to prevent cash flow problems, and eliminate any stress related to struggling to pay your bills.
If you’re new to self-assessment, you’ve not used the payments on account system before, or you don’t know where to start filling in a tax return, it’s wise to consult an accountant.
An experienced accountant can help you :
- Organise your finances
- Prepare your tax returns
- Understand what the payments on account system means for you.
It’s very easy to make a payment to HMRC. There are various options available once you have submitted your tax return.
- Paying online
- Paying over the telephone
- Using a CHAPS or BACS transfer
- Using your credit or debit card online
- Making your payment at a post office, bank or building society
Paying online is usually the fastest, simplest option.
It’s important to bear in mind that it can take time for some payments to clear.
If the deadline is fast approaching, you’ll need to factor in the time it takes to process your transaction.
It’s also vital to make your payment on the last working day if the 31st falls on a weekend.
Sorting your tax return early
There’s a lot to be said for being organised when it comes to filing your tax return.
If you calculate your tax payment and submit your return before the deadline, this will prevent stress, and also increase the chances of receiving any refunds as quickly as possible.
Once you have a figure for your upcoming tax bill, you can also budget in advance and give yourself more time to sort out that payment.
You’ll also eliminate the risk of penalties for late payment.
Being organised can also help you plan ahead if your accounts reflect a different story to the previous year.
If your income has dropped or increased significantly, this gives you a chance to meet with an accountant and discuss the best ways to approach your next payment.
What happens if you leave, opt out of or cancel self-assessment?
If your circumstances change, you’ll need to notify HMRC.
If you’ve been self-employed, but you’ve given up that job and started a new job as an employee, you’ll be eligible to pay any tax you owe.
But once the deadline has passed and a new tax year has begun, you’ll pay tax only through the PAYE scheme.
If you have any questions or concerns about opting out of self-assessment or changing details that relate to your income, contact your tax advisor or HMRC.
The benefits of seeing a tax advisor
For many people who are self-employed, preparing and filing a tax return is a low point in the calendar year.
With a tax advisor, tax doesn’t have to be complex or convoluted.
Your accountant can :
- Take care of your returns for you
- Offer you tailored advice
- Help to simplify the process
- Make it much less stressful.
A tax advisor will also be able to help you with taxable expenses and offer advice about payments on account.
If you think you could or should reduce your payments on account get in touch with Universal Accountancy.Contact us