There are many who are confused with both, the terminology and the understanding of the mechanism. Nonetheless, it is one of the simplest rules of taxation. And in this very brief article, we will try to enlighten all those who see it as a puzzle.
But first we will make a small introduction to understand and clarify some basic principles and concepts.
Payments on account, are a kind of advance payments towards your tax bill (including Class 4 National Insurance if you’re self-employed) or in more simple terms, someone could say these are prepayments for future tax obligations. And "payments" has plural character, because there are two payments. The first deadline expires on January 31 and the second on July 31 of each following year.
Payments on account do not apply to employees or companies. As a general rule, its applies to everyone who prepares and submits self-assessment tax return. A self-assessment tax return must be made by all persons who are self-employed and those, whose income is not specified in either PAYE or elsewhere, so that HMRC could be aware of it. In other words, if someone has additional income (other than from employment sources), this person must submit a self-assessment tax return.
Click HERE to see the full list of those who are required to submit a tax return.
Attention! The 'Tax Return' should not be confused with whether a person is obliged to pay or not its taxes in the UK. Whether a person is obliged to pay or not, depends on the institutional and technical regulations, and whether to make a tax return or not, under general rules (there is some exceptions), depends on whether this person is a UK tax resident or not.
Payments on account must be made by everyone whose tax bill (including Class 4 National Insurance if the person is self-employed) is more than £ 1,000. But, you do not have to make 2 payments on account every year if:
A. your last Self Assessment tax bill was less than £1,000 or
B. you’ve already paid more than 80% of all the tax you owe, for example through your tax code or because your bank has already deducted interest on your savings
Regarding the reason - why the HMRC imposes this mechanism of payment, there is no clear explanation, to be accurate, there is no explanation at all by today. However, a person has the opportunity to reduce the payments on account, if the person knows that the next tax bill is going to be lower than last year.
Be careful if you underpay, as you’ ll be charged interest.
Let's look at some examples to make our topic more understandable. We will look at successive tax year to understand how the mechanism works when paying for the first time and for the following year.
Lets suppose that someone started work in the tax year 2016/17 and earned income, on which have to pay £ 1,800 in taxes. Since the obligations exceed £ 1,000, that person have to make an advance payment in two installments. So, in the first case the situation is as follows:
1800 (main tax liabilities) + 1800 (payments on account) = 3600 - the total amount due for the tax bill of 2016/17. Payments should be as follows:
Α installment - £ 2,700 (£ 1,800 + £ 900) by 31/01/2018 Β installment - £ 900 by 31/07/2018
The same person, for the tax year 2017/18, has £ 3,000 in tax liabilities. This means that its adjusted (balanced) new liability is £ 1,200 (3,000 current tax bill - 1,800 payments made). Payments should be as follows:
Α installment - £ 2,700 (£ 1,200 + £ 1,500) by 31/01/2019 Β installment - £ 1,500 by 31/07/2019
Understanding the above examples, it is conceivable that if the profits increases, payments on account increases as well and vice versa. In a cases where over-payment are made, HMRC makes a tax refund, or where it is omitted, the taxpayer request it by using its HMRC online tax account.
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Attention! This article is intended to give only a general informative picture and should not, in any case, be taken as a rule. It is strongly recommended to seek a full and professional guidance specifically for your circumstances before making any decisions.