If your tax liability in a single tax year is greater than £1000, you will have to make payments on account. The payments, due in January and July each year, are based on an estimation that assumes that your tax liability in the current tax year will be the same as the previous year. This blog post in our Business Basics series aims to help you better understand what they are, who needs to pay them, how they’re calculated, and the implications of not paying them on time.

What are payments on account?

Payments on Account are advance payments towards your tax bill. They are designed to help spread the cost of your tax liability, ensuring that taxpayers don’t face a hefty bill at the end of the tax year. These payments are typically required if your tax bill for the previous year was more than £1,000. If under the £1,000 threshold, your full tax liability payment is due on 31st January.

How do I know how much I need to pay and when do they need to be paid?

Payments on Account are calculated based on your previous year’s tax bill. You are required to make two payments each year, with each payment being 50% of the previous year’s tax bill. These are due by:

• 31 January: The first payment on account
• 31 July: The second payment on account

For example, if your tax bill for the last tax year was £2,000, you would need to make a payment of £1,000 by 31 January and another £1,000 by 31 July in the coming year.

What if I haven’t made the amount I was taxed on in the previous year?

When your tax return is submitted it will detail your actual income and tax due. If more tax is owed, a balancing payment will be due. Balancing payments are due on 31 January, along with the first payment on account for the following tax year. A refund can be claimed and issued if tax due is lower than the estimation. You can also choose to leave any excess funds to go towards your next tax bill.

We always encourage our clients to file their tax return as soon as possible at the start of a new tax year, so that if your tax liability is higher than expected, you have time to plan and save.

Consequences of Missing Payments

Failing to make Payments on Account by the due dates can result in interest charges and penalties. Interest is charged from the day after the payment deadline until the tax is paid. If you miss the balancing payment due on 31 January, additional penalties apply:

• 5% of the unpaid tax after 30 days
• Another 5% after 6 months
• A further 5% after 12 months

How to prepare for your Payments on Account

Keep Accurate Records: Maintain detailed records of your income and expenses throughout the year to help you estimate your tax liability accurately.

Budget for Payments: Set aside funds regularly to ensure you can meet your Payments on Account deadlines without financial strain.

Seek Professional Advice: Consider consulting with an accountant, especially if your income fluctuates significantly or you have complex financial affairs.

Payments on Account can seem like an additional thing to think about, but they are designed to help you manage your tax liabilities more evenly throughout the year. Understanding how they work and planning accordingly can ease the financial pressure and help you stay compliant with HMRC regulations.

If you have questions about Payments on Account, get in touch with us or download our free self-assessment tax return checklist and FAQ mindmap.