If you’re new to finance and accounting, the term “Payment on account” might be confusing for you. So, we’d make it easy for you in simple words.
Payment on accounts is the amount received by HMRC as an advance payment from some businesses (Self-Employed) against Income Tax and Class 4 National Insurance.
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Who is liable to pay it?
If you’re self-employed, you have to make this payment as per the below conditions:
- If your last year’s Income Tax and Class 4 National Insurance (Self Assessment tax bill) is more than £1,000
- You haven’t paid 80% tax due on you through tax code or bank or any other way
These payments are due at midnight of 31st January and 31st July and they have calculated as half of your last year’s tax bill and class 4 National Insurance liability.
You should remember that class 2 National Insurance is not included in it.
Important: You should note that due to the crises of Covid-19, HMRC has provided a relaxation. Now, you can pay your liability of 31st July on or before 31st January without any extra charges or penalty.
If there’s a payment left after doing it, you need to prepare a balancing payment before 31st January of the next year to avoid penalties.
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Example:
Bruce is a self-employed business consultant. He’s to pay £2000 as Income tax and class 4 NIs for the first year of his business 2018/19 due before 31 January.
As his due amount is above £1,000 and he hasn’t paid through other sources. He is liable for payment on accounts. Now, his payments are due on 31st July and 31st January(2018/19) and he’s to make 2 payments of £1000. It implies that on 31st January 2020, Bruce must pay a total of £3000 ( £2000 + £1000) to HMRC. Onwards in July 2020, he’ll pay an additional £1000.
Suppose if he submits his tax returns with a liability of £1300 and he’s already paid £1100 as payment on accounts. He’ll pay only £200 as a balancing payment that is due by 31st January of the next year.
Key Takeaway: You should remember that payment on accounts does not include the liabilities of capital gains and students loan as self-employed. You will pay them on balancing payment.
How can I check payment on account?
By checking it, you’d find out your payments that are already submitted and payments that you’re liable to pay for the next tax year’s bill. There are three steps provided by HMRC to check the status of your payment of account:
- Sign in to your online account provided by Gov.UK
- Click on the option to check your latest Self Assessment return
- Click on the view statement
If you’re already aware of your tax bill that it’s going to be less than the previous year, you can contact HMRC to reduce your payment on account. You can also do it online.
You’d get a refund if you overpaid and you’d be charged interest by HMRC if you paid less than your due amount.
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How we can help:
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Disclaimer: This blog is written just for informational purposes.