Self Assessment payments on account

If you run your own business, you'll probably need to make Self Assessment payments on account. This post explains what these are and when they are payable.

Self Assessment payments on account

What are Self Assessment payments on account?

In order to collect income tax and Class 4 National Insurance via Self Assessment HM Revenue uses a system called payments on account.  This is designed to ensure that they receive payment of your tax liabilities sooner rather than later.

When are they due?

Payments on account are typically paid on the 31 January and 31 July of every year. For example, your first 2020/21 payment on account is due on 31 January 2021. The second 2020/21 payment on account is due on 31 July 2021.

How are they calculated?

Each payment is half of your total estimated tax liability for the current tax year (less any tax paid at source). So for example, if you've been trading for years, your 2020/21 payments on account (due on 31 January 2021 and 31 July 2021 will be based on your 2019/20 tax liability.

If your actual tax liability is greater than your payments on account, the difference is payable the following 31 January. So for the 2020/21 tax year this would be the 31 January 2022.

If your actual tax liability is less than your payments on account, the difference is repayable when you submit your tax return. Alternatively it is credited against your next payment on account. 

An example

Craig makes 2020/21 payments on account totalling £4,000 (£2,000 each on 31 January 2021 and 31 July 2021) However, his actual 2020/21 tax bill amounts to £4,500.

On 31 January 2022 he is required to make a payment of £2,750: This is made up as follows:

  • The balance of his 2020/21 tax liability (£4,500 less £4,000 paid on account)
  • His first 2021/22 payment on account of £2,250. This being half of his 2020/21 tax liability of £4,500 shown above

On 31 July 2022 Craig makes a second payment on account of £2,250 (half of his actual 2020/21 tax bill). When his final 2021/22 tax bill is calculated, he may have an under/over payment which will be adjusted in the payment collected on 31 January 2023.

Because payments on account are based on your previous year’s income tax liability, it is important to understand whether your current year’s taxable profits are increasing or decreasing. If they are decreasing, it may be worth reducing your payments on account. If you don't, you could end up overpaying tax unnecessarily.

Equally if you reduce your payments on account and the final tax liability is higher than previously anticipated you'll be charged interest on the additional tax which should have been paid on time.  You can see what HM Revenue's interest rates on overdue tax are here.

When are payments on account not due?

However, there are a few exceptions to the rule namely as follows:

  • If your income tax liability is less than £1,000, you do not have to make payments on account
  • Where more than 80% of your income is taxed at source, you do not have to make payments on account. An example of this is where you are employed full-time under PAYE

Other points

It's important to mention that  payments on account do not include capital gains tax liabilities or student loan repayments. These would  usually be included in the balancing payment mentioned above.

If you’re self employed or trade through a limited company and have income tax to pay on your dividends and salary it's sensible to set aside sufficient monies for tax. This is especially important if you've moved from full time employment to contracting through a limited company. 

This is because you may need to pay the balance of your previous year's tax liability and first payment on account together for the first time. I

If you've have taken advantage of the deferment option for payments on account offered by HM Revenue as part of their COVID19 initiatives you'll also need to ensure you have sufficient funds set aside.

In both of these cases we'd recommend having a separate personal bank account specifically for your income tax liability so you aren't caught by surprise.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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