Payments on Account for Income Tax Explained

Understanding ‘Payments on Account for Income Tax’ is crucial for anyone involved in the UK’s Self Assessment tax system. This guide aims to clarify what these payments are and how they impact your tax responsibilities.

What Are Payments on Account for Income Tax?

‘Payments on Account‘ are payments in advance towards your Self Assessment tax bill. They are calculated based on your previous year’s tax liability and are typically required from individuals with non-PAYE income, such as the self-employed or those with significant savings interest.

Who needs to make these payments?

You are required to make ‘Payments on Account’ if your last Self Assessment tax bill was over £1,000, and less than 80% of that bill was deducted at source, such as through PAYE. It’s a common requirement for self-employed individuals, contractors, and business owners who have varying income streams.

How does it work?

The total amount you need to pay is essentially an estimate, based on your tax bill for the previous year. You make two payments each year;

1. The first payment is due by midnight on 31st January, which is also the deadline for your Self Assessment tax return. This payment includes any tax owed for the previous year and the first instalment for the current year.
2. The second payment is due by midnight on 31st July.

Adjusting Your Payments

If you anticipate that your income will be lower than in the previous year, you can apply to HMRC to reduce your ‘Payments on Account’. However, it’s crucial to be accurate in your estimates to avoid underpayment and potential interest charges.

Balancing payments

Because payments on account are based on estimated figures, once you have filed your Self Assessment, you will have either a balancing charge or a repayment. If you are due a repayment from HMRC, you can enter the bank details for your payment on your tax return.

An Example

Say your tax liability for the year to 5th April 2023 is £20,000.

Your tax payment of £20,000 for 2023 would be due 31st January 2024. Your first payment on account of £10,000 for the 2024 tax year would also be due 31st January 2024. Your second payment on account of £10,000 for the 2024 tax year would be due 31st July 2024.

Say your tax liability for the year to 5th April 2024 is £25,000.

You have already paid £20,000 on account, so your balancing payment of £5,000 for 2024 is due 31st January 2025. Your first payment on account of £12,500 for the 2025 tax year would also be due 31st January 2024. Your second payment on account of £12,500 for the 2025 tax year would be due 31st July 2025.

Final Thoughts

Ensuring your ‘Payments on Account’ are correct can be a helpful tool in managing your tax liabilities, especially for those with fluctuating incomes. However, it’s important to understand how it works to avoid surprises and manage your cash flow effectively.

At Nichols & Co, we’re committed to providing you with the expertise and guidance to navigate these tax requirements with ease.