Payments on account for personal tax returns (self assessment) can be one of the most confusing things to understand when it comes to your income tax bill.
The personal tax year in the UK runs from 6th April to 5th April – for example, the 2019/20 tax year is for the period 6th April 2019 to 5th April 2020.
If you have to file a personal tax return, this needs to be filed with HMRC no later than 31 January after the end of the tax year (assuming an online tax return).
This is also the date when the balance of tax owed for the tax year is due.
If you are not affected by payments on account this means that the normal tax payment timeline looks like this:
However, HMRC under some circumstances will ask you to make tax payments ahead of this timeline, they call these payments on account (often abbreviated to POA).
Payments on account explained
So what exactly are payments on account?
You will have to make two payments on account each year, unless you meet either of the below criteria:
- If your last tax return tax bill was lower than £1,000; or
- If you have already paid more than 80% of your total personal tax calculation, for example if you are in employment (PAYE) then your employer will be deducting tax through your salary and tax code
For example, if you are both employed and self employed and your total tax calculation for the year is £15,000 and you have already paid £13,000 of this through your employment, you won’t be drawn into payments on account as you will have already paid more than 80% of your tax owed through your employment.
However, if the majority of your income is not taxed at source then you are likely to be drawn into the payments on account system.
If most of your income comes from self employment or from dividends from your limited company then you will likely need to make payments on account.
With regards to how much your payments on account are – it will be based on your previous years tax bill, with two payments due of 50% of this each – one by 31 January during the tax year and the second one by 31 July after the tax year.
These two payments on account are then taken into account when your final tax payment is due by the following 31 January – this may mean a bit more tax is due for the balance at that point, or if you have paid too much on account already a refund will be factored in.
Applying to reduce your payments on account
By default each payment on account instalment will be calculated as 50% of the previous years tax bill – however if you believe that your tax bill will be lower, you can apply to HMRC to reduce your payments on account – for more information on this see the HMRC link below:
Be aware that if you apply to reduce your payments on account and subsequently it turns out that the tax was higher than expected and therefore the payments on account should not have been reduced, HMRC will re-instate the payments that should have been paid and also charge you interest on these underpayments, so we would recommend only to reduce your payments on account if you have a good degree of certainty on your tax position.
Also, payments on account do not include anything you owe for capital gains tax or student loan repayments – these will get included in the final years balancing payment.
