Payment on Account is essentially HMRC's method for self-employed individuals to prepay a portion of their next tax bill, in addition to settling their current one. This system requires you to make two payments each year – one by January 31st and another by July 31st – each typically equal to half of your previous year's tax liability.
Understanding Payment on Account
For many self-employed persons, their initial encounter with Payment on Account is quite the surprise, as it demands not just clearing the due tax for the past year but also making a significant advance towards the forthcoming year’s tax. This advance payment is determined based on your last Self Assessment tax bill, projecting half of that amount towards your future tax obligation.
Illustrative Example
Suppose your tax liability for the past year was £4,000. Under Payment on Account, you'd not only settle this amount but also make an advance payment of £2,000 (half of your current bill) towards your next tax bill by the 31st January deadline. The second instalment of £2,000 would be due by 31st July.
Adjustments and Balancing Payments
If your income varies, resulting in a higher or lower tax bill than anticipated, HMRC will adjust your Payment on Account accordingly. Should your income increase, leading to a higher tax liability, you might have to make a 'Balancing Payment' to cover the difference. Conversely, if you overpay due to a decrease in income, HMRC will refund the excess or adjust your next Payment on Account.
Dealing with Financial Challenges
Facing difficulties in fulfilling the Payment on Account can be daunting. It's crucial to engage with HMRC proactively if you foresee payment issues. HMRC may offer a 'time to pay' arrangement, allowing you to spread your tax payments over a more manageable period, thereby avoiding potential penalties and interest on overdue amounts.
Key Takeaways
- Payment on Account entails making advance payments towards your next year's tax bill.
- It ensures that self-employed individuals spread their tax payments throughout the year.
- Adjustments are made based on actual income, ensuring fairness in the system.
Communication with HMRC can provide solutions if you're unable to meet your Payment on Account obligations.
