What are payments on account, why do you have them and can you reduce them?
Whether you are completing your first ever tax return or you have been completing them for years – a lot of people find themselves completely caught out by HMRC’s policy on tax payments and the ‘payments on account’ which are expected of them.
For those of you with a personal tax bill of under £1,000 you will complete a tax return to 5th April each year and then your tax bill will be due to be paid before the following 31st January. Once your personal tax bill is over £1,000 HMRC essentially expects you to start paying your tax bill for the following year in advance. They obviously cannot know exactly what your tax will be for the following year so they work on the basis that you will have the exact same tax bill.
The payment schedule works so that your tax bill is calculated to 5th April, then you pay the balance by 31st January the following year. Then HMRC take that total and look to receive a further 50% of it also before the same 31st January and the remaining 50% by 31st July. This total is then offset against whatever your tax bill eventually ends up being for the following year.
To show by way of example – if your tax bill was £1,500 for the year to 5th April 2018 then you would be expected to pay £1,500 by 31st January 2019 to clear your balance for the 17/18 tax year. You would also be expected to pay £750 (your first payment on account for the 18/19 tax year) by 31st January 2019 and the remaining £750 (your second payment on account for the 18/19 tax year) by 31st July 2019. This is based on your 18/19 tax bill being £1,500 the same as your 17/18 bill. Once your tax return to 5th April 2019 has been completed, if it turns out that your tax bill is really £1,700 then the following January you would have to pay the £200 balance as well as £850 as your first payment on account towards the following year. If it turned out your tax bill for 18/19 was only £1,300 then HMRC would refund you £200 and you would have to pay the £650 payment on account towards the following year.
Where this is flawed is the assumption that your tax bill will be the same year on year. If you have an abnormally high tax bill one year which you know is a one off, you may wish to reduce these payments on account as you know the following year’s bill will be significantly less. The risk here is that if you reduce the payments on account too far, and they end up not covering whatever your tax bill actually is, HMRC may hit you with penalties and interest. How can you get around this? You can pay your first payment on account in January then – before paying the July payment on account – you can provide Grampian Accounting with the information to complete your tax return. If your tax return can be finalised before the July deadline for the payment on account then you can pay whatever the actual remaining balance of your tax bill comes to instead of an estimate based on historic data.
If you are paying payments on account and you want to pay your accurate tax bill instead of an estimate then we urge you to send us your tax return information as soon as possible. If we can complete your tax return before the end of July then we could potentially save you overpaying HMRC and ending up out of pocket for months until HMRC refund you the overpayment. Even if you aren’t due a repayment – the sooner your personal tax bill is finalised, the sooner you can plan for these tax payments.
If you would like to know more about Payments on Account or have any questions then please do not hesitate to contact us (whether a current client or not) on 01224 748 298 or by email to firstname.lastname@example.org