Self Assessment; Explaining payments on account

Self-assessment can be a nightmare, and something that business owners across the land dread, each and every year. One of the most commonly misunderstood sections of the self-assessment process is Payments on Account.

Many accountants fail in explaining Payments on Account to their clients. As a result, we thought we’d help out, starting by letting you know, exactly what Payments on Account is…

Payments on Account – What is it?

Devised to spread the cost of the year’s tax across the year, “Payments on Account are normally required from any taxpayer who is assessed to income tax, in any amount, for the preceding tax year” (Source: HMRC).

The result is two payments being made; one by the 31st January of that tax year and the other by the 31st July of the following tax year.

It is generally considered to be advanced payments towards the tax bill for that year.

But in which circumstances must it be paid?

How do you know if it is owed?

Payments on Account is all dependent upon how much your tax bill equates to. “You need to make one if your bill is more than £1,000, unless you’ve already paid more than 80% of it” (Source: Gov.uk).This could have already been paid through your PAYE tax code, for example.

As with most things tax; it is a lot easier to understand it by taking a look at it in practice.

So let’s take a look at explaining Payments on Account through the use of an example;

Example

You’re a new start-up company. Your tax bill for the year ending 2013/14 has come to £1,200.

Using the “Payments on Accounts” process, we will then calculate what is owed, and when it is owed for the following year; 2014/15.

31/01/2015

£1,200 (Tax bill for the Year 2013/14)
+ £600 (50% of the bill for the previous tax year, 2013/14 – goes towards your 2014/15 tax bill)
£1,800 is due by the 31st January 2015

 31/07/2015

The remaining £600 (the other 50% of the bill for the 2013/14 tax year, which also goes towards your 2014/15 tax bill) is then due 6 months later, by the 31st July 2015.
 
As you can see, you have paid a total of £2,400. £1,200 for the year 2013/14, and £1,200 for the year 2014/15.

 
However;
At the end of the 2014/15 tax year, it may be the case that you’ve only incurred a tax bill of £1,100. Having already paid £1,200 (in two instalments of £600) for that year, you will be due a rebate of £100.

 
£1,100 (Tax bill for the Year 2014/15)
(£1,200) (The amount already on paid on account re: the year 2014/15)
£100 is due as a rebate for the tax year 2014/15

 Using the “Payments on Account” process, we can then calculate what is owed, and when it is owed for the following tax year, 2015/16.

31/01/16

£550 (50% of the bill for the previous tax year, 2014/15 – which goes towards your 2015/16 tax bill)

 31/07/16

£550 (the other 50% of the bill for the previous tax year, 2014/15 – again going towards your 2015/16 bill)

Still Confused?

Of course, whilst you may be able to follow this now; when it comes to the mad-rush of filing your tax return, you may come unstuck.

Not to worry. At Cooper Curtis, it’s our job to take care of these matters – so that you can take care of the things that you do best.

Contact Us today on 0845 303 1144 and we’d be more than happy to help.

Please note, all our content is for general guideline only, every case is different and we would recommend speaking to us before taking any action as a result of the content. The content was correct at the time it was published.