Demystifying Payment on Account for Self-Assessment: Your Essential Guide

Navigating the world of self-assessment tax returns can be a daunting task, especially when you come across terms like “payments on account.” But fear not! In this comprehensive guide, we’ll break down everything you need to know about your payment on account, making the entire process simpler and more manageable. Whether you’re new to self-assessment or a seasoned pro, this essential guide will help you understand the ins and outs of payments on account, including how they’re calculated, when they’re due, and how you can potentially reduce them. Here at Direct Peak, we have handled countless queries and questions surrounding all areas of tax, so we hope to shed plenty of light on this somtimes confusing area of tax.

Crunching the Numbers: How Payments on Account are Calculated

The Calculation Explained

Essentially, payments on account are determined by taking 50% of your previous tax year’s tax and Class 4 National Insurance liability. This calculation is used by HMRC to estimate the amount you’ll owe for the upcoming tax year and helps to spread out the cost of your tax bill over two separate payments.

A Real-World Example

To help illustrate how payments on account are calculated, let’s look at an example. Imagine that during the tax year 6th April 2022 to 5th April 2023, your tax bill (including Class 4 National Insurance) amounts to £8,000. To calculate your payments on account for the next tax year, you would simply take 50% of this amount:

£8,000 x 50% = £4,000

In this case, you would be required to make two payments on account of £4,000 each. The first payment would be due on 31st January 2023, and the second payment would be due on 31st July 2023. By making these payments, you’ll be contributing towards your tax bill for the following tax year, helping to minimize the financial impact when the time comes to settle your tax obligations. There’s a handy article here from Which? that provides some different ways to pay your bill

Adjusting the Course: How to Reduce Payment on Account

When Reductions May Be Necessary

There may be instances when you know that your tax bill for the current year will be lower than the previous year. In such cases, it’s possible to apply for a reduction in your payments on account to better reflect your anticipated tax liability. This could be due to a decrease in income, changes in your personal circumstances, or an increase in allowable tax deductions.

Applying for a Reduction

To apply for a reduction in your payments on account, you can use your HMRC tax portal. This online system allows you to log in and submit a request to lower your payments on account. You will need to provide an estimate of your expected tax bill for the current year, and HMRC will use this information to recalculate your payments on account accordingly.

Reassessing Your Situation

It’s essential to keep in mind that if you apply for a reduction and your tax bill ends up being higher than anticipated, you may face interest charges on the difference. As such, it’s crucial to regularly reassess your financial situation and make any necessary adjustments to your payments on account to avoid potential penalties. If your financial circumstances change, you can always submit a new application to either increase or decrease your payments on account as needed. 

Reductions can be a less straight forward area for you to deal with on your own, so it might be a good idea to reach out for professional help if you think any of these circumstances may apply to you. A good accountant will cost money, but should ultimately save you money in the long run. Have a read here about how much you can expect to pay an accountant and what to keep an eye out for when looking for a good accounting partner.

Overpayments and Refunds: What Happens When You Pay Too Much

When completing your tax return, you may discover that you’ve overpaid on your payments on account. Overpayments can occur if you’ve miscalculated your tax liability or if you’ve successfully reduced your payments on account but still paid more than necessary. In such cases, it’s important to rectify the situation and claim a refund from HMRC.

Claiming a Refund

To claim a refund for overpaid payments on account, you can do so through your HMRC tax portal. The process is straightforward and involves providing the necessary details to support your refund claim. Once your tax return has been submitted and processed, HMRC will assess your claim and, if approved, issue a refund for the overpayment.

Timeframes for Receiving Refunds

The timeframe for receiving your refund can vary, but generally, HMRC aims to process refunds within a few weeks. It’s important to ensure that your bank account details are up to date with HMRC to avoid any delays in receiving your refund. If you haven’t received your refund within a reasonable timeframe, you can contact HMRC to inquire about the status of your claim.

Key Dates for Payment on Account and Staying Compliant

First Payment on Account Deadline: 31st January

The first payment on account is due on the 31st of January, the same day as your self-assessment tax return payment. For example, for the tax year running from 6th April 2022 to 5th April 2023, the first payment on account would be due on 31st January 2023. It’s crucial to ensure that you make this payment on time to avoid any penalties or interest charges from HMRC.

Second Payment on Account Deadline: 31st July

The second payment on account is due on the 31st of July. Continuing with the example above, the second payment on account for the tax year 6th April 2022 to 5th April 2023 would be due on 31st July 2023. As with the first payment, it’s essential to meet this deadline to stay compliant and avoid penalties.

Importance of Staying Compliant

Staying compliant with your payments on account is crucial not only to avoid penalties and interest charges but also to maintain a good relationship with HMRC. By making your payments on time, you demonstrate your commitment to fulfilling your tax obligations and contribute to a smoother tax filing process in the future.

Tips for Managing Your Payment on Account

To ensure that you remain compliant with your payments on account, consider the following tips:

• Set reminders for payment deadlines to avoid missing them.
• Regularly review your tax liability to make any necessary adjustments to your payments on account.
• Work with a professional accountant or tax advisor to help you navigate the payments on account process and ensure you’re paying the correct amount.

Simplifying Payment on Account and Getting Expert Help

Understanding payments on account for self-assessment tax returns is essential to staying compliant and managing your tax obligations effectively. We’ve covered the key aspects of payments on account, including how they’re calculated, the possibility of reducing them, handling overpayments, and crucial deadlines.

By staying on top of your payments on account, you can avoid penalties, interest charges, and maintain a good relationship with HMRC. However, managing these payments can be overwhelming and time-consuming, especially for those with limited experience in tax matters.

If you find the process daunting or need expert guidance, Direct Peak Accountants are here to help. Our team of experienced accountants can assist you in understanding and managing your payments on account, ensuring you stay compliant and make the right decisions for your financial situation.

Don’t hesitate to reach out to us if you need assistance with your self-assessment tax return and payments on account. Let Direct Peak Accountants make the process stress-free and straightforward for you. Get in touch today!