Once you have submitted your tax return, you will know your tax bill and what you owe. How then do you go about paying HMRC and when should you do this? That’s where payments on account come in. They’re part of the self assessment process and therefore relevant to UK tax payers where less than 80% of your income has tax deducted at source (that means tax deducted from your income before you receive it, such as where an employer pays an employee under the PAYE system).
Payments on account spread the cost of your tax bill into two installments over the year. It was designed as a method for paying some of your tax bill in advance and therefore to prevent people being indebted to HMRC. It may all sound very simple but there are many aspects and rules so, we’ve put this post together because not understanding and knowing this process could cost you time and money.
Of note however, in no way should you substitute this information for taking sound professional advice. Instead, gaining a better understanding will provide you with better insight into the complex nature of the self assessment process and the essential need to:
The first installment is due by midnight on 31 January and it is calculated by looking at your previous year’s tax bill. The deadline for the second installment is midnight on 31 July. Whilst spreading your payments out over the course of the year, it also helps the Exchequer by ensuring they receive what is effectively a forward payment by the summer.
Each of your installments will usually be 50% of your previous tax bill. So consider the following simple, hypothetical example. If you paid £50,000 total tax in the 2015/16 tax year you would have to make a first payment on account of £25,000 by 31 January 2017 and, another £25,000 by 31 July 2017. Simple right? Not so I’m afraid, read on because you may well need to factor in a “balancing payment” moving forward and that might impact on your payment plan.
This is where confusion may arise. Check the diagram above to help you with this, you’ve paid a total of £50,000 by 31 July based on our 2015/16 tax bill. However, your total tax owed for the 2016/17 tax year comes in at £70,000 based on your 2017 tax return.
That then means you have an outstanding balance of £20,000 (£70,000 owed minus the £50,000 paid by 31 July). This is called the balancing payment and it has to be settled by 31 January 2018. Your 2018 payment plan would work as follows.
Total tax to pay on 31 January 2018 of £55,000 consisting of:
£20,000 balancing payment for 2016/17
£35,000 first payment on account for 2017/18 (50% of your 2016/17 total tax bill which was £70,000)
Another installment on 31 July 2018 of £35,000 for 2017/18 (the next 50% of your 2016/17 tax bill).
You won’t have to make two payments in the year if:
Payments on account can become potentially problematic if you earn a lot of income one year and this then drops significantly the next. You may foresee a cash shortage if you know for certain that your tax bill will be lower than last year. You can therefore request that HMRC reduce your payments on account.
Be warned though, reduce your payments on account by too much and HMRC will charge you interest and penalties for underpaying your tax (see next section). Alternatively, HMRC can refund you if your payments on account are greater than your total tax bill.
Payments on account exclude sums you may owe for capital gains or student loans. Instead, these items are covered in your balancing payment.
You can access what you owe the tax man through HMRC online services. It provides you with the payments you need to make in January and July and also gives you access to historical payments on account.
This all highlights the need to be putting money aside regularly to ensure you’re able to fulfill your tax payments at the beginning and mid point of every calendar year. Find an advisor to help you put in place a tax payment plan that ensures you can manage your personal finances effectively.
You can pay using the following methods:
Consider carefully that it takes 3 working days to process a payment via bacs, direct debit (if you’ve already set it up) and cheque (upon receipt). So you need to factor that in around the deadline. If you haven’t set up a direct debit arrangement with HMRC then remember that the first payment will take 5 working days.
If the payments on account deadline falls over a weekend or bank holiday, then you need to make sure your payment reaches HMRC on the last working day before.
Being tax efficient is a process that starts with your tax return. We've written a piece about how to be better prepared for your online tax return, and here's a summary of the benefits of submitting it well before the deadline:
Filing you tax return early (before the 31 January deadline) will mean you should receive any tax refund you may be due soon after submission. In instances where you think you have overpaid tax, be sure to get your return in as promptly and early as possible. That way you can obtain your refund sooner.
Payment and cash planning
Filing your tax return results in a tax liability calculation and presents you with the total tax bill you owe to HMRC. In that sense doing so earlier means you can plan and give yourself more time for setting money aside for payment. This then allows you to better manage your cash flow and finances.
Also, if your tax liability comes in under £3,000 and you submit your tax return in December, then you have the option of your tax liability being paid through your tax code. So it will simply be deducted from your wages or pension at whatever interval arrangement you have set up (weekly or monthly).
Your income might vary markedly from one year to the next. Whether a significant increase due to a dividend payment or, a steep decline as a result of trading losses, early submission provides more time for tax planning.
That means you (and/or your advisor) have sufficient time to assess your circumstances to see where you might be paying more tax than you legally should be. Savings could be achieved.
Rushing your tax return in just before the deadline is more likely to lead to errors due to less time for checking the accuracy of what is stated compared to your income streams. You’ll need time to collect financial documents and bank statements to fill in your return properly. If HMRC uncover errors you’ll be subject to penalties.
What if you have a query and need help from HMRC? You’ll have to phone their helpline and that is a notoriously time consuming process. It’s even worse during tax return season in January when their lines are bombarded with these kinds of calls. Avoid it if you can, it could impact on your submission.
Your tax advisor/accountant
Your accountant will likely deal with a lot of tax returns on behalf of their clients every January. That means if you provide your information close to the deadline then you could end up rushing when collating information and missing out key items from the data you supply. The risk then is a late filing, a situation your accountant might not be able to avoid.
So if you're required to fill out a self assessment tax return then you'd do well to follow this plan so that potential savings can be achieved and late payment penalties avoided:
As the saying goes, “fail to plan, plan to fail”.
The content of this post is up to date and relevant as at 07/06/2017.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.