Payments on Account – what, why and when?
Self Assessment tax returns
You may notice on your 2016/17 self-assessment tax return that you are being asked to make ‘payments on account’ towards your 2017/18 tax return. This will be the case if your Income Tax and class 4 National Insurance total more than £1,000 for the tax year and you don’t pay tax at source on more than 80% of your income (e.g. a taxed salary).
How much will you pay?
You will be asked to pay two payments on account. Each amount you have to pay will be half of your previous year’s tax and class 4 NI bill. So, if your tax bill for 2016/17 was £2,000 then each payment on account you’d need to make towards of your 2017/18 tax bill would be £1,000.
When do I need to pay?
The first payment on account for 2017/18 is due by 31st January 2018, along with the tax you owe for 2016/17 tax year. The second payment on account is due by 31st July 2018. For example, if the tax owed for 2016/17 is £2,000:
Due by 31st January 2018 – £2,000 (2016/17 tax bill)
£1,000 (first payment on account for 2017/18)
£3,000 (total due)
Due by 31st July 2018 – £1,000 (total due for second payment on account for 2017/18)
Please be aware that different payment methods take different amounts of time to reach HMRC so make sure you make your payment in plenty of time to avoid penalties and interest.
More details on payment methods can be found here.
Can payments on account be reduced?
Payments on account can be reduced if you know that your tax and class 4 NI bill will be lower next year, for example if trading has been much reduced this year or you know you will be taking a lesser dividend payment. This should only be done if you are certain that your tax bill will be less, as if the payments on account are reduced too far HMRC will treat this as underpaid tax and will charge you interest.
It is important not to ignore payments on account as if you do not pay them you will be charged interest on any amount due. Once your 2017/18 tax return is prepared, if you owe less tax than you have paid you will receive a refund, if you have not paid enough you will then owe the difference.
If you would like any further clarification please do not hesitate to contact us.
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