Once you start being eligible to complete a Self Assessment tax return, you may be liable to make payments on account. It sounds a lot more daunting than it actually is, so here’s our easy guide to everything you need to know.
What are Payments on Account?
In basic terms, these are advance payments that you make towards your future tax liability. If you are self-employed they also include Class 4 National Insurance contributions.
Payments are made on the 31st January and 31st July and relate to the next tax year. The amount you have to pay is based on your last tax return.
For example, for the 18-19 tax year you will pay two amounts, on the 31st January 2019 and 31st July 2019. Each of the payment amounts will be half of your total tax liability for 17-18. You will then complete your tax return by 31st January 2019.
It may be the case that on 31st January 2019 you will need to pay a balancing amount for 17-18 as well as your first payment on account for 18-19. This will happen if your 17-18 payments on account were lower than your total tax due.
Who is eligible for Payments on Account?
Not everyone who completes a Self Assessment Return will need to pay payments on account. If you have already paid more than 80% of your total tax liability, through your tax code or tax on interest then you are exempt. Also, if your last tax bill was lower than £1,000 you will not be required to pay payments on account.
What if I need to change the amount?
If you estimate that your future tax bills are going to be higher than previous returns, you can voluntarily start making payments on account or increase the amount you are due to pay. This makes practical sense as you won’t be faced with a big bill when you submit your final return.
You can also choose to reduce your payments on account if you believe that your tax liability will decrease, perhaps because you have entered employment or had a change in circumstances.
If you have overpaid your payments on account, you will receive a refund once you have submitted your Self Assessment return relating to that year.
Payments on account are only due relating to VAT if your liability is more than £2.3 million for a year. In this case, you would make payments in advance each month towards your quarterly return value.
Corporation Tax payments on account are due for companies whose profits are more than £1.5 million for an accounting period. Payments are made in four instalments, with two of these being before the end of the relevant accounting period.
Whilst it might seem like a large cash outlay, using payments on account actually makes good sense in terms of tax planning. It means that you’re not faced with a large balancing bill in the future and can plan your cash flow around the two payment milestones.
If you would like to know more about payments on account or are concerned that your liabilities have not been correctly calculated please get in touch.