The mystery around payments on account

03 Jul The mystery around payments on account

One thing we get asked by new clients and new business owners is what are payments on account and why do I need to pay them? Well, let us give you a quick explanation…

In the UK tax system, payments on account are a way for taxpayers to pay their income tax in advance. It’s like making a down payment on your tax bill for the following year.

Here’s how it works… If your tax liability exceeds a certain threshold, usually £1,000, HM Revenue and Customs (HMRC) will ask you to make two payments on account during the year. These payments are based on your previous year’s tax liability and are due in two installments: one by January 31 and the other by July 31.

The idea behind payments on account is to help taxpayers avoid a large tax bill at the end of the tax year whilst also ensuring HMRC receive regular payments from tax payers. HMRC estimates your upcoming tax liability and divides it into two equal parts for the payments on account. If your actual tax liability turns out to be less than what you’ve paid on account, you’ll receive a refund. However, if your actual liability is higher, you’ll need to pay the remaining amount by the following January 31 and may also be required to make further payments on account for the upcoming year.

Let’s consider an example of payments on account with a tax due amount of £2,000.

In this case, your payments on account for the upcoming tax year would each be £1,000. They are due in two installments:

1. The first payment on account of £1,000 would be due by January 31 of the tax year in addition to the actual tax due on this date
2. The second payment on account of £1,000 would be due by July 31 of the tax year.

Therefore, by making these two payments on account totalling £2,000, you would have already paid a significant portion of your estimated tax liability for the year in advance. This helps in spreading out the tax burden and preventing a large tax bill at the end of the tax year.

Payments on account can sometimes be a bit complex, so it’s important to keep track of your income, expenses, and any changes in your circumstances to avoid surprises. Always feel free to get in touch if you want a more detailed example or any explanation specifically for your situation.

We’re friendly down to earth accountants trying to make your life easier and give you an understanding of your accounts & tax position.