Payment on accounts

HMRC Payment on accounts (for self-assessment) are payments you make in advance on your tax bill, which includes Class 4 National Insurance, if you are working for yourself.

Running your own show as a sole trader holds many benefits and one of them is that at first, you don’t have to pay taxes on the profit you make until the year ends. This is the exact opposite of someone who makes a living while being taxed through the PAYE system where taxes are deducted from their salary from day one.  In case of the self-employed HMRC must wait a year before they get the tax due. So, if your tax bill is less than £1000, no advance tax to pay if is above then what the tax needs to be paid are twice amount in the tax year ie the tax that would be payable or expected profit for the second year will need to be paid now with the current tax due, this allows HMRC to get your tax lability for the second year in advance.

It’s worth nothing though that self-employed individuals do need to make additional self-assessment payments – this is what we call ‘payment on account’ – i.e. payments you make in advance to clear any tax dues for future years.

When do I need to make payment on account and how do I know I have to make them?

Payments on account are made to HM Revenues and Customs (HMRC) twice a year and nearly all sole traders pay them to help spread out the cost of their tax bill.

When you make the two payments on account every year, you also need to keep in mind a few exceptions:

  • You had a self-assessment tax bill from the previous year which amounted to less than £1,000;
  • You paid more than 80% of last year’s tax owed – either through interest deduction on savings (via your bank) or through your tax code.

Another important aspect of payment on account is that the bi-annual payments are 50% of your tax bill from last year, with payments being due on January 31 and July 31, before midnight.

In case there are still tax payments left once you have made your payment on account for self-assessment, you must make a ‘balancing payment’ by January 31 next year, before midnight.

As we pointed out earlier, not every self-employed individual is required to make payments on account. In fact, some sole traders pay only what is owed by January 31 after the tax year has come to an end.

Therefore, just to quickly reiterate: payments on account for self-assessment are due if your last year’s self-assessment tax bill was more than £1,000 and you have not already paid more than 80% of the tax you owe at source.

What to do if I’m late on payments?

Failure to pay the entire tax bill by January 31, midnight, will lead to interest charges on the amount owed. If you believe that you may not be able to make your payment on account by this date, you need to inform HMRC at the earliest so that a “Time to pay” agreement can be put in place. This protects you in a way because if your tax bill comes up to, say, £20,000, then you won’t have to live through the ordeal of trying to pay an extra £10,000 to clear your first payment on account.

Adam Accountancy are well versed in payment on account procedures. Talk to us now to determine how much your payment on account is.

Further knowledge from https://adamaccountancy.co.uk/cis-construction-industry-scheme/HMRC can be found by clicking here 

 

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Published On: April 12th, 2023 / Total Views: 278 / Daily Views: 1 /

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