What are self-assessment ‘payments on account’?

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When your income is solely from employment, the tax landscape seems quite straightforward. However, throw into the mix dividends, self-employment, or property rental income, and tax matters become considerably more complex.

Under the self-assessment model, you need to make ‘payments on account’ towards your income tax liabilities. Let’s delve deeper into the intricacies of what a payment on account entails.

How does the Self-assessment Income Tax System Function?

The self-assessment system collates all your taxable income (irrespective of its source) for each tax year, which ends on 5 April annually. Your income can be derived from:

  • Employment income
  • Self-employment and partnership income
  • Dividends and other investment income
  • Property rental income, capital gains and any other income that falls within the tax net

It also takes into account the National Insurance due on your self-employment and partnership income (but not your employment income).

The sum of tax due is computed, considering your personal allowances, any deductions, student loan repayments, and National Insurance (excluding NI on employment income).

Calculating your Payments on Account

How does HM Revenue & Customs (HMRC) determine the Payments on Account (POA) due? The relevant tax charge is the sum of the gross tax due (excluding capital gains tax and student loan repayments) and Class 4 National Insurance contributions.

If this amount is less than £1,000, or more than 80% of it was paid through PAYE, you can sidestep POA and simply settle any outstanding amounts by 31 January following the tax year end in question.

If the relevant tax charge is more than £1,000 and less than 80% is collected through PAYE, payments on account apply.

When are Payments on Account Due?

For each tax year, there are two POAs, each equal to 50% of the relevant tax charge from the previous tax year. The first instalment is due by 31 January within the tax year, and the second by 30 June after the tax year concludes.

If you anticipate that the POAs will exceed the actual tax due, you can apply to reduce your payments. This could be due to a drop in income, an increase in income subject to PAYE, or any other reason. If you reduce the POAs too much, interest (but no penalty) will be charged on the underpayments.

Please note, any tax deducted at source, like PAYE earnings from an employed job or on earned interest, will reduce your January payment.

Practical Implementation of Payments on Account

We compute the payments on account simultaneously as we work on your self-assessment return. If the POAs can be minimised, we will apply for the reduction on your behalf.

Once we’ve informed you of the due amount for January and July, it’s your responsibility to make the payment to HMRC. Payments can be made online, or by completing the form attached to your tax notification from HMRC and attaching a cheque.

Can I Minimise my July Payment on Account?

If your income for 2022/23 has dropped compared to the previous tax year 2021/22 and you were unaware of the reduction in January, it may be beneficial to complete your personal tax return before 31 July and apply to reduce your payment on account. This could be necessary if your 31 July tax payment may result in an overpayment of tax due to a decrease in untaxed earnings or profits or an increase in tax reliefs. If this is the case, it may be prudent to reduce your 31 July tax payment on account.

Let’s Discuss your Payments on Account

POAs often catch many off-guard, especially in the first year of receiving income from self-employment and dividends, where it isn’t taxed at the source.

We’re here to help you estimate the likely due payments and prepare you for these two significant payments at different points in the year.

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