Payments on Account – What are they, who needs to pay and how are they calculated?creative77
What are they?
Payments on account are HMRC’s way of ensuring you at least pay some tax upfront ready for the following years tax liability.
Who needs to make payments on account?
You will need to make payments on account for 2021/22 if your tax and Class 4 National Insurance liability for 2020/21 was at least £1,000, unless you paid at least 80% of what you owe under deduction at source, for example, under PAYE.
Calculating the payment on account
When calculating your payments on account for 2021/22, the starting point is your tax and Class 4 National Insurance liability for 2020/21.
HMRC assume that the liability remains roughly constant year-on-year so the payments made on account will collect an amount equal to the previous year’s liability.
Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability, however, Class 2 National Insurance contributions are not taken into account when working out payments on account.
When are they due?
Payments on account are due:
- By 31 January in the tax year
- By 31 July after the tax year
HMRC may write to you at the start of the year regarding your payments on account but this is not always the case!
Where the eventual liability is more than that paid on account, the balance must be paid by 31 January after the end of the tax year, together with any Class 2 National Insurance due for the year. If the liability has fallen, the excess can be offset against future liabilities (for example, payments on account for the following year) or, where this is not possible, refunded.
Option to reduce payments on account
If you think that your liability for 2021/22 will be lower than for 2020/21, you can opt to reduce your payments on account. This may be the case if, for example, you have lost a key customer or are struggling to recruit staff or secure supplies.
There are various ways in which you can tell HMRC that you want to reduce your payments on account. This can be done by signing into your online personal tax account and using the ‘reduce payments on account’ option or by completing form SA303 and sending it to HMRC.
You can also tell HMRC that you want to reduce your payments on account in the ‘other information’ box on the self-assessment tax return. You will need to specify what you want to pay and the reason for the reduction.
However, beware of reducing the payments on accounts below that which you will eventually owe – while this may help your cashflow temporarily, you will be charged interest on the difference between what you should have paid and what you have paid.