What are Payments On Account For Self-Assessments?

What are Payments On Account For Self-Assessments?

Payments on account are advance payments towards your tax bill, including Class 4 National Insurance if you’re self-employed. These payments are part of the self-assessment tax system in the UK and are required if your tax bill exceeds a certain threshold and you don’t pay enough tax at source.

Why Payments on Account Exist

Payments on account are designed to help taxpayers manage their cash flow by spreading the cost of the upcoming year’s tax over two payments. This system ensures that taxpayers are not caught off-guard by a large tax bill at the end of the year, helping to even out financial planning over the year.

Who Needs to Make Payments on Account?

Taxpayer Requirements

You will need to make payments on account if your last Self-Assessment tax bill was over £1,000, unless more than 80% of that liability was withheld at source, such as through PAYE. These payments are generally required from self-employed individuals, landlords, and others receiving sizable income not taxed at source.

How Payments on Account Are Calculated

Each payment on account is half of your previous year’s tax bill. For example, if your tax bill for the year was £4,000, you would make two payments of £2,000 each — one on 31 January (the end of the tax year) and another on 31 July.

Impact of Payments on Account on Taxpayers

Effects on Cash Flow: Having to advance a significant portion of your tax liability can impact your cash flow. It requires careful budgeting and financial management to ensure that you have the funds available when these payments are due.

Importance of Budgeting: Taxpayers should plan their finances with these payments in mind. Anticipating the amounts and setting aside funds regularly can prevent financial strain.

How to Manage Payments on Account

Effective management involves setting aside money each month in preparation for these payments. Using financial tools or software can help keep track of how much to save and when payments are due.

Consequences of Not Making Payments on Account

Penalties and Interest: Failing to make payments on account on time can result in penalties and interest charged on the overdue amount. This can lead to an increased tax bill the following year.

Impact on Future Tax Returns: Missed or incomplete payments on account complicate future tax returns and can alter your financial planning for the subsequent year.

Tips for Handling Payments on Account

Practical Advice for Taxpayers:

  1. Understand Your Obligations: Ensure you fully understand when and how much you need to pay by checking your Self-Assessment tax return or asking an accountant.
  2. Budget Wisely: Divide your expected tax payment by 12 and save that amount each month.
  3. Use Technology: Employ budgeting apps or accounting software to keep track of payments and financial health.
Reducing the Burden

If your income significantly decreases, you can apply to HMRC to reduce your payments on account. This requires evidence of reduced income and should be managed carefully to avoid underestimating your tax liability.

Understanding and managing payments on account is crucial for taxpayers within the self-assessment framework. Effective planning and budgeting are key to handling these payments without disrupting your financial stability. With careful management and the right tools, you
can ensure that payments on account do not become a burden, maintaining smooth financial operations throughout the year. Contact QAccounting if you need any assistance with your self-assessment.

More Blogs

How to Correct Mistakes on Your Self Assessment Tax Return

This guide will explain how to correct mistakes on your Self Assessment tax return, detail the deadlines for making these corrections, and discuss the implications of not correcting errors. Additionally, we’ll highlight how QAccounting can support you in ensuring your tax return is accurate.

Accounting Team

Holiday Financial Planning for Self-Employed Individuals

In this blog, we will explore practical strategies for navigating these challenges, ensuring you maintain financial stability and capitalise on opportunities for growth as the year comes to a close.

Accounting Team

Do I Legally Need an Accountant for My Limited Company?

This blog will explain whether a limited company in the UK is legally required to hire an accountant.

Accounting Team