Payments on account are one of the most misunderstood areas of the self assessment process but are something you need to be aware of if you are self employed. With the deadline for the second payment on account looming this week (Friday 31 July 2015) we explain what payments on account are, why you have to pay them, and how they can help you to manage your tax bill across the year.
What are Payments on Account?
Payments on account are tax payments made twice a year by individuals who are self-employed towards the tax due in your current tax year. The amount owed is calculated by looking at your previous year’s tax bill, and is due in two instalments on 31 January (alongside any balancing payment to clear your tax bill for the previous year) and 31 July.
Each instalments will normally be half your previous year’s tax bill so, if for example, you paid £5,000 in tax for the 2013-14 tax year you would have made a first payment on account of £2,500 on 31 January 2015, and will be due to make another payment of £2,500 on 31 July towards your tax bill for the 2014-15 tax year.
Why do I have to pay in advance?
Payments on account are intended to help you spread your tax bill across the year. On this basis if your income in 2014-15 is more or less the same as in the previous year by making payments on account you should have paid most, if not all of your tax liability for the tax year before the deadline on 31st January 2016.
Are there any exemptions?
If your tax bill for 2013-14 was less than £1,000 or 80% or more of your tax was collected at source (i.e. through your pay slip) then no payments on account will be due to be paid.
Can I reduce my Payments on Account?
If you believe your income will be lower than the previous tax year you can request to have your payments reduced. However, if your tax bill turns out to be higher than you have estimated you may have to pay interest and penalties on the shortfall, as well as having to pay a large balancing payment in January 2016 which would not help beat the January blues!
What should I do if I think my Payments on Account are too high?
It is important to bear in mind that Payments on Account are calculated on the assumption that your income will be the same each year therefore the sooner you file your 14/15 tax return the quicker we can determine the correct amount of tax you are due to pay this year.
What happens if I have paid too much?
Don’t worry, if you have overpaid we can help you receive a refund from HMRC.
How do I pay?
Details of how you can pay can be found on the HM Revenue and Customs website. If you have already paid then you need take no further action but if your second payment is outstanding it is important you pay by 31 July to avoid being charged interest and a late fee.
If you have any queries about payments on account, or you would like to speak to one of the team at Bambridge Accountants about your taxes please do not hesitate to call us on 020 3757 9290 or email us.