Why does HMRC want my tax paid upfront? Payments on account explained

When you file your Self Assessment tax return, you might be asked to make what are called ‘payments on account’. These are payments towards your next tax bill, made in advance and based on your previous year’s tax bill.

If your last Self Assessment tax bill is less than £1,000, or if you paid more than 80% of the tax owed through your tax code, you will not be asked to make payments on account.

Assuming neither of those things apply to you, you will have to pay two amounts of tax towards the next bill, the first by midnight on 31 January and the second by midnight on 31 July. Each payment is half the amount of the previous year’s tax bill. If there is any additional tax to pay, you must make a ‘balancing payment’ by midnight on 31 January of the following year. If you end up owing less tax, then – provided your next tax payment is not due within thirty days – you will be awarded any refund that might be due.

Here’s an example to show what that might look like:

Robert’s tax liability for 2021/2022 is £2,800. That’s more than £1,000, and PAYE and tax paid at source cover less than 80% of the total due.

Robert will need to make payments on account for 2022/2023 (the tax year to 5 April 2023).

Remember, the payments made on account are based on the previous year’s tax bill. That means that by midnight on 31 January 2023, Robert must have paid his current tax liability – £2,800 for 2021/2022 – plus half that amount, £1,400, in advance for 2022/2023. The second payment on account must be made by midnight on 31 July of that year.

By midnight on 31 January 2024, Robert will make any balancing payment due for the tax year 2022/2023 – let’s say there’s an additional £200 due – plus 50% of his total tax on account for 2023 to 2024 (£1,500, because his total tax for this year is £3,000 – £2,800 on account plus the balancing payment of £200).

Let’s set those figures out:

Payment due by midnight on 31 January 2023

£2,800 = tax liability for 2021/2022,

£1,400 = first payment on account for 2022/2023

£4,200 total

Payment due by midnight on 31 July 2023

£1,400 = second payment on account for 2022/2023

Payment due by midnight on 31 January 2024

£   200 = balancing payment for 2022/2023

£1,500 = first payment on account for 2023/2024

£1,700 total

Payment due by midnight on 31 July 2024

£1,500 = second payment on account for 2023/2024

It keeps rolling on

Provided each year’s tax bill is around the same, or increases, then this arrangement keeps on rolling. There’s more tax to pay in the first year payments on account are applied, because you pay the current year plus 50%, but after that things even out.

Amendments to the return

If HMRC make an amendment to your return or you notify them of an amendment that will increase the tax due, any extra tax will be payable thirty days from the date of the amendment – although interest will be charged from the date that tax should have been due.

What if my next tax bill will be less?

If, for whatever reason, you expect your next tax bill to drop, but you are still being asked to make payments on account based on last year’s bill, you can apply to reduce your payments on account.

However, you should bear in mind that if you reduce your payments on account to an amount below what they should in fact have been you will have to pay interest on the shortfall from the date each payment on account was due. Also, if the reduction is considered to be excessive, HMRC may charge a penalty.

Example – reducing payments on account

Say Robert expects his income for 2022/2023 to be much lower than that for 2021/2022, meaning his payments on account as requested will be higher than necessary. He calculates that his tax bill for 2022/2023 will be around £2,200, a reduction of £600. He therefore applies to HMRC using form SA303 to reduce each instalment of his 2022/2023 payments on account by £300 – he will pay £1,100 each time, not £1,400.

If his income is as expected or even a bit lower, that’s all fine. If it’s higher, however, an adjustment will be needed.

Let’s say on 10 February 2023 Robert realises that he has reduced his payments on account by too much. He now expects his tax bill for the year 2022/2023 to be nearer £2,500 – an increase of £300.

Robert again uses form SA303, this time to let HMRC know he will need to pay more tax on each instalment. He has already paid the 31 January 2023 instalment of £1,100 (half of £2,200) so he needs to pay a further £150 on that instalment via his Government Gateway account. He will also need to pay £1,250 by 31 July 2023.

Robert will have to pay interest on the additional £150 that should have been paid with the first instalment on 31 January 2023. The interest will run from 1 February 2023 to 10 February 2023 – the date HMRC received payment of the £150 via his online account. The July instalment is not yet due so there is no interest to pay on that.

I have made a payment on account, but now realise I paid too much. What can I do?

As above, you should complete form SA303. Any excess that you have paid will be refunded to you, as long as it is at least thirty days until your next payment is due. If your next payment is due within thirty days, the refund will be held and set against the next payment due.

Advantages to making payments on account

It might not seem that there are any advantages to being asked for payments on account, but there are. First, it can help spread the cost of tax over the year. You can make sure you set aside an amount every month for the tax, or even just pay it into your Government Gateway account – just make sure you hit those deadlines or else interest will be charged on any balance outstanding, plus there is the potential for penalty charges to be applied.

Also, paying the appropriate amount on account avoids big unexpected payments. Yes, you take a hit the first time payments on account are applied, but after that it keeps rolling along.

Where can you get help?

There’s a wealth of information on the government website (www.gov.uk). However, your accountant should be helping you to plan regarding your personal finances – forward planning is crucial, especially when it comes to tax.

At SBCA, we help people just like you with personal finance planning. Get in touch with the team to get your personal tax affairs organised. Call today on 01772 204102.

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