Paying your tax on account is aimed to help spread the cost of your tax bill over the year rather than having to find a large lump sum all in one go.
Why do I have to make a payment on account?
If your self-assessment tax bill is over £1,000 you will need to make advanced tax payments on account to HM Revenue and Customs (HMRC).
There will be two payments: one due by the 31 January and the other by 31 July. Each will be credited towards your coming tax bill that is due by the following January.
If 80% or more of your tax is collected at source e.g. by an employer, or your tax bill is under £1,000, you do not need to make any payments on account.
How are my payments on account calculated?
Your payments on account are calculated as 50% of last year’s tax bill. This assumes that profits have remained relatively consistent.
How can I reduce my payments on account?
You can ask HMRC to reduce your payments on account. You’ll need a reasonable estimate of the tax you will pay in the coming year. You can tell HMRC the new figure you want to reduce your payments to either on your tax return or by filing a form known as SA303.
You’ll also need to tell HMRC the reason why you want to reduce your payments on account. This can include: –
- Business profits are down
- Other income has gone down
- Tax allowances and reliefs have gone up
- Tax deducted at source is more than in the previous tax year
If it turns out that you have reduced them too much, you could face interest charges and even a penalty if the claim was fraudulent or negligent. The best way to make sure that this does not happen is to be certain of your figures. Your accountant should help you with your calculations.
Any reduction made now will be applied to both payments. Once this is done, this could mean that you paid too much in January – that extra amount can help to cover the reduced July payment, or mean you have nothing to pay.
How do I know how much to pay HMRC?
Your accountant will tell you how much to pay HMRC each January and July.
If you have a personal tax account with HMRC you can use it to check your upcoming personal tax payments.
How do I pay HMRC my payment on account?
You will need to know your Unique Taxpayer Reference (UTR). It will be on most of your correspondence with HMRC, usually as the reference, or your accountant can give it to you.
The easiest way to pay is with a debit card. They will take credit cards but there are fees.
Bank transfer can be made to the following HMRC account
- Sort code: 083210
- Account number: 12001039
- Account name: HMRC Cumbernauld
- Payment reference: your 11-character UTR
Example – Payments on Accounts for the tax year ending 5th April 2020
Darren is an Associate Dentist and has started trading as a limited company. For the tax year 5th April 2019, his accountant advised him to take income from his company as a salary of £11,850 and a dividend of £34,500, to be tax efficient and avoid paying personal taxes at higher rates. Darren has a personal tax liability of £2,438 to pay to HMRC by 31 January 2020.
Because his tax is over £1,000, he has to make payments on account for the following tax year ending 5th April 2020. The payments on account are due in two installments of £1,218 (50% of £2,438) by 31 January 2020 and 31 July 2020.
Darren has a tax payment to make on 31 January 2020 of £3,656. This is made up of the £2,438 for 5th April 2019 and the 1st payment on account due for 5th April 2020 of £1,218. This is effectively a payment of 18 months of tax. Darren’s next tax payment is the 2nd payment on account for 2019/2020 of £1,218 and is due to HMRC by 31 July 2020. This payment is effectively 6 months of tax.
Darren’s accountant advises him to budget for £1,218 of personal tax payments every 6 months going forward. This is in addition to his company’s tax payments.