Paying your personal taxes on account means that you will pay half your annual tax payment twice a year ‘on account’ in January and July rather than having to find a large lump sum all in one go every January.
By understanding what payments on account are, you’ll make more informed decisions about your taxes.
What affects whether I have to make a payment on account?
When your total income tax and class 4 national insurance is over £1,000, you’ll need to make a payment on account for the coming tax year to HM Revenue and Customs (HMRC).
However, if you have investment, employment or pension income, and more than 80% of your total income tax has already been deducted from your payments from your investment(s), employer or pension company, you won’t need to make any payments on account.
How are my payments on account calculated?
They are calculated as 50% of your previous year’s tax and class 4 national insurance bill.
Any student loans, capital gains tax, and class 2 national insurance contributions are excluded. They do not require payments on account to be made.
When do I have to make my payments on accounts?
There are two payments in a tax year: one due by 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 the amount of tax you have to pay when you file your tax return has increased from the previous year, then the amount you pay in January will be greater than the July payment. Your January payment will include any balancing tax payment for the previous tax year.
If the amount of tax you have to pay when you file your tax return has decreased from the previous year, the amount you pay in January will be lower than the July payment. Your January payment will be offset by a refund tax payment from the previous year.
What if I overpay?
If you have overpaid your payments on account, HMRC will repay you when you file your tax return. You will usually get the repayment within 5 working days.
How can I reduce my payments on account?
You can ask HMRC to reduce your payments on account if you think your income will decrease in the following year. You’ll need a reasonable estimate of the tax you expect to pay in the coming year. You can tell HMRC the new reduced payment on account figures either on your tax return or by filing a separate form.
You’ll 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 this does not happen is to be certain of your figures. Your accountant should help you with your calculations.
Any reduction made will be applied to both payments. This means that if you paid too much in January, any overpayment may mean you can reduce the July payment, or you have nothing to pay, or you’re owed a refund.
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 prepare and file your own tax return, the HMRC calculation will tell you how much your payments on account will be.
If you have a personal tax account with HMRC you can check your upcoming personal tax payments.
HMRC will post a statement of account ahead of each January and July payment date.
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 10-character UTR
Why is the first year’s tax payment for the self-employed so high?
In relation to earnings, the first tax payment of any new self-employment is the one most people fail to prepare for and are totally surprised at how much they need to pay to HMRC.
Your first January tax payment will be for the first 12 months (assuming you started in April) of profits plus a 6 month first ‘payment on account’. There will then be a second payment in July for a further 6 months of taxes ‘on account’. The first 2 tax payments will be paying tax for 24 months – 12 months based on actual profits and 12 months ‘on account’ based on ‘provisional’ profits.
Example 1 – Newly self-employed making first payments on account
Davina started her self employment in April 2019. and has prepared her accounts for the first year to March 2020.
Davina’s accountant has told her that she has a taxable income of £86,500 and has a tax liability to pay of £26,982. Davina knows that she must pay her taxes in full for the first year by January 2021.
Davina is surprised to find out from her accountant that she needs to make two payments on account of £13,412 for the tax year 2020-2021 based on her March 2020 accounts. Her accountant tells her she needs to make the 1st payment by 31 January 2021 and the 2nd payment on account by 31 July 2021.
Davina needs to budget for payments of £40,394 by 31 January 2021 and £13,412 by 31 July 2021. Davina expects her income and expenditure to remain the same year on year. Her accountant tells her to budget for a tax payment of £13,500 every 6 months due by the end of January and July.
Example 2 – First year payments on account
Darren is an Associate Dentist and has started trading as a limited company. For the tax year 5th April 2022, his accountant advised him to take income from his company as a salary of £8,800 and a dividend of £41,470, to be tax-efficient and avoid paying personal taxes at higher rates. Darren’s tax return is prepared and he has a personal tax liability of £2,678 to pay to HMRC by 31 January 2023.
Because his tax is over £1,000, he has to make payments on account for the following tax year ending 5th April 2023. The payments on account are due in two installments of £1,339 (50% of £2,678) by 31 January 2023 and 31 July 2023.
Darren has a tax payment to make on 31 January 2023 of £4,017. This is made up of the £2,678 for 5th April 2022 and the 1st payment on account due for 5th April 2023 of £1,339. This is effectively a payment of 18 months of tax. Darren’s next tax payment is the 2nd payment on account for 2021/2022 of £1,339 and is due to HMRC by 31 July 2023. This payment is effectively 6 months of tax.
Darren’s accountant advises him to budget for £1,339 of personal tax payments every 6 months going forward. This is in addition to his company’s tax payments.
Example 3 – Second year increased payments on account
Darren has had a great year and is able to increase his dividend and salary payments from his company.
For the tax year 5th April 2020, his accountant advised him to take income from his company as a salary of £12,500 and a dividend of £37,500, to be tax-efficient and avoid paying personal taxes at higher rates. Darren’s tax return is prepared, and he has a personal tax liability of £2,663 to pay to HMRC by 31 January 2021.
He has already made 2 payments on account for this tax year ending 5th April 2020. The payments on account were due in two instalments of £1,218 (50% of £2,438 for year 1) by 31 January 2020 and 31 July 2020. Darren now has a balancing tax payment to make on 31 January 2021 of £225 (£2,663-£2,438).
Darren’s 31 January 2021 tax payment is made up of the £225 balance owing for 5th April 2020 and the 1st payment on account due for 5th April 2021 of £1,331 (50% of £2,663 for year 2). Darren’s 31 January 2021 tax payment totals £1,557 (£1,331+£225) and a further £1,331 and is due to HMRC by 31 July 2021.
Example 4 – Third year decreased payments on account
Darren has had a bad year due to COVID.
For the tax year 5th April 2021, his accountant advised him to take income from his company as a salary of £12,500 and a dividend of £30,000, Darren’s tax return is prepared and he has a personal tax liability of £2,100 to pay to HMRC by 31 January 2022.
He has already made 2 payments on account for this tax year ending 5th April 2021. The payments on account were due in two instalments of £1,331 (50% of £2,663 for year 2) paid on 31 January 2021 and 31 July 2021. Darren now has a balancing tax repayment of £563 (£2,100-£2,663).
Darren’s 31 January 2022 tax payment is made up of the £563 repayment balance owing for 5th April 2021 and the 1st payment on account due for 5th April 2022 of £1,050 (50% of £2,100 for year 3). Darren’s 31 January 2022 tax payment totals £487 (£1,050-£563) and a further £1,050 and is due to HMRC by 31 July 2021.