Payment on accounts

Payments on account are advance payments made to HM Revenue and Customs (HMRC) towards your tax bill. These payments help to spread the cost of your tax liability over the year, ensuring that you do not face a large tax bill in one go.

Why You Need to Make Payments on Account

1. Self-Assessment Tax Returns: If you file a self-assessment tax return, you may be required to make payments on account. This usually applies if you have significant income not taxed at source, such as self-employment income, rental income, or investment income.
2. Tax Bill Threshold: Payments on account are required if your tax bill is more than £1,000. This threshold includes any tax owed on self-employed income or any other income not taxed at source.
3. Income Not Subject to PAYE: For those whose primary income is not taxed through Pay As You Earn (PAYE), such as freelancers or business owners, payments on account ensure that HMRC receives tax revenue throughout the year rather than waiting until the tax return is submitted.
4. Cash Flow Management: Making payments on account can assist in managing cash flow, avoiding a large lump-sum payment at the end of the tax year. It helps taxpayers budget more effectively and meet their tax obligations more smoothly.
5. Legal Obligation: As a legal requirement under the UK tax laws, failing to make payments on account can result in interest charges and penalties. This ensures compliance with tax regulations and avoids additional financial burdens.

When You Don’t Need to Make Payments on Account

1. Tax Bill Below £1,000: If your tax liability for the year is less than £1,000, you will not be required to make payments on account. This can often apply to those with lower levels of untaxed income or where tax reliefs reduce the overall tax liability.
2. Overpaid Tax: If you have already paid more tax than you owe for the year through PAYE or other deductions, and you have a credit balance with HMRC, you may not need to make payments on account. Any overpayment can be carried forward or refunded.
3. Income Taxed at Source: If the majority of your income is taxed at source through PAYE or other mechanisms, and only a small portion is untaxed, payments on account may not be required. This is often the case for individuals with primarily salaried income and minor additional untaxed income.
4. Changes in Circumstances: If your income has significantly reduced compared to the previous year, you can apply to reduce your payments on account. HMRC allows taxpayers to adjust payments based on their current financial situation, avoiding overpayment of taxes.
5. Special Exemptions: In certain cases, HMRC may grant exemptions or adjustments based on individual circumstances. This can include situations where taxpayers have exceptional financial difficulties or other valid reasons for not making payments on account.

Managing Payments on Account

To effectively manage your payments on account, consider the following steps:

1. Accurate Estimates: Ensure that your income estimates are accurate to avoid underpaying or overpaying. Regularly review your financial situation and adjust payments if necessary.
2. Budgeting: Plan for your payments on account by setting aside funds throughout the year. This helps in avoiding financial strain when the payment deadlines approach.
3. Communication with HMRC: Maintain open communication with HMRC, especially if your financial circumstances change. Use HMRC’s online services to manage and view your account, ensuring that all payments are up to date.
4. Professional Advice: Seek advice from a tax professional or accountant to ensure compliance and optimize your tax strategy. They can provide guidance on managing payments on account and navigating any complexities in your tax situation.

Conclusion

Payments on account are an integral part of the UK tax system for those with significant untaxed income. They ensure that tax liabilities are spread throughout the year, promoting better cash flow management and compliance with tax laws. Understanding when you need to make these payments and when you might be exempt can help in effectively managing your tax obligations and avoiding unnecessary financial strain.

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.

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