Understanding payments on account

Understanding payments on account

Payments on account are advance payments on your tax bill (and class 4 NICs if you are self-employed). These payments help you make contributions to your next tax bill in advance.

What does payment on account mean?

A payment on account simply means making an advance payment of a tax bill for the next tax year.

Why is HMRC asking for payment on account?

HMRC likes to smooth out the receipt of taxation income as much as possible and to prevent individuals and businesses being too in debt to the taxman. By requiring a payment on account for the next tax bill, HMRC can receive income in advance of the money being earnt helping them to manage their cashflow more easily.

How to calculate Self-assessment payments on account

Payments on account for income tax and class 4 NICs are calculated as half your previous years tax bill. Let’s look at an example to see it in action.

John Smith has a tax bill of £5,000 for 2021/22. He makes two payments on account of £1,400 each during 2021.
The total tax to pay by midnight on 31 January 2023 is £4,700. This includes:

  • the ‘balancing payment’ of £2,200 for the 2021 to 2022 tax year (£5,000 minus £2,800)
  • the first payment on account of £2,500 (half the 2021 to 2022 tax bill) towards the 2022 to 2023 tax bill
  • He will then have a second payment on account of £2,500 on 31 July 2023.

If his take bill for 2022/23 exceeds £5,000, there is a balancing payment due by 31 January 2024.

Why is my self-assessment tax bill larger than I expected?

When you submit your first self-assessment as a self-employed person, you might be shocked at the level of your tax bill. This is because HMRC will ask for payment on account for the following year at the same time as you make payment for the current year (see the calculation below). This will increase your tax bill by 50% of your first year’s bill.

How do I reduce payments on account?

If you believe that your tax bill next year will be lower than your current year tax bill, you can elect to reduce your payments on account by logging into your self-assessment online account and selecting ‘Reduce payments on account’ option. However, be aware that should underpay your tax bill because you reduced your payments on account, you will be charged interest on the amount underpaid.

Where do I show payments on account on my tax return?

Payments on account are automatically deducted from your tax bill when you complete your tax return so there is no need to add the figures onto your return manually.

What happens if I’m late making my payment?

HMRC will penalise you if you are late with payments as follows:

  • 5% of tax unpaid after 30 days
  • Additional 5% of tax unpaid after 6 months
  • Additional 5% of tax unpaid after 12 months

You can estimate your penalties and interest for late payments online.

Do you make payments on account for Corporation Tax?

HMRC requires large companies to make advanced payments towards their Corporation Tax bill on a quarterly basis. Companies making profits between £1.5m and £20m must estimate their corporation tax during month seven of their accounting period and make their first payment on account. A further payment on account is due 3 months later.

A company with accounting period 1 January 2023 to 31 December 2023 would make payments as follows:

1st payment – 14 July 2023
2nd payment – 14 October 2023
3rd payment – 14 January 2024
Last payment – 14 April 2024

If your profits exceed £20m, the payment dates are the 14th day of months 3, 6, 9 and 12 of the accounting period. There are some exceptions to this rule, available on the Gov.uk website.

If your company makes less than £1.5m in annual profit, your corporation tax bill is due in full 9 months and 1 day after your accounting period end.

What about payments on account for VAT?

VAT payments on account (VPOA) are required if you owe more than £2.3m in VAT in any period of 12 months or less. Working out payment amounts and due dates is quite complex so it’s worth talking to an accountant if you believe your company is likely to exceed the £2.3m threshold.

Need help with your payments on account?

Payments on account can be a little tricky to work out, especially when you are newly in business or if your company doesn’t meet the standard criteria for Corporation Tax or VAT payments on account. Adams Accountancy can review your situation and advise you on all aspects of your tax payments on account so you avoid errors and costly penalties. Chat to us on 01322 250001 today.