Payments on Account: Explained

Let's talk about payments on account.

You may by familiar with the payments on account scheme if you are already filing self assessment tax returns and/or are self-employed here in the UK. You fall into this scheme when your tax liability exceeds £1,000 in a prior year, and what it essentially means is that you have to start paying future tax liabilities based on your most recent numbers.

This can come as a shock when you first enter the scheme as you need to make additional payments in January and July, on top of anything you currently owe. This can catch out small business owners who are not on top of their requirements with HMRC.

You have two payments on account to make to HMRC. The first payment is made on 31 January 202X and the second payment made on 31 July 202X.

The January date is important as that is also when you must pay any remaining tax from your previous tax year.

As for the payment amount itself, the amounts on either date is calculated at 50% of the tax paid from your previous submission, with the idea that your trade will be largely consistent year on year and your tax liability is paid up sooner to HMRC.

If your business profits have changed, it's worth reviewing your position as soon as you can in the new tax year. This is because you can apply to reduce these payments. This should be approached with caution and careful planning however, as HMRC will charge interest if your payment later fall short.