If you're self-employed, you get the pleasure of paying HMRC not just once, but twice. There's your tax bill, which is due by 31 January (or 31 October, if you file using a paper return). And then there are payments on account, which are due twice a year.
Here's how the UK payments on account system works and when they fall due in 2019.
What are payments on account?
Payments on account are advance payments on your tax bill. So, when you make a payment on account in 2019, this will count towards your tax bill for the 2020/21 financial year. Payments on account cover income tax and Class 4 National Insurance.
When you’re employed, your tax is deducted at source each month through the PAYE (pay as you earn) system. Which means that your money’s whisked away before you get the chance to spend it by mistake.
By contrast, as a self-employed worker, you don’t pay tax on your income as you earn it. You pay at the end of the year once you know exactly how much you’ve earned.
Paying annually can be riddled with pitfalls — especially if you’re new to working this way and don’t know how, or even how much, to budget for your tax bill. And that’s where payments on account come in.
Payments on account allow you to split your tax bill into two payments. This should make settling your tax bill easier because you won’t have to fork out a large amount of money all at one go.
When are payments on account due?
Payments on account are due twice a year: on the 31 January and on the 31 July.
You have to make payments on account if:
- Your tax bill is £1,000 or over
- You’re self-employed
- You’re both employed and self-employed but 80 per cent of your income comes from self-employment
How much do you have to pay?
Each payment on account is equal to 50per cent of your last tax bill.
Here’s how that works.
If your tax bill for 2018-19 is £3,000, you have to make two payments on account for 2019/20 each equal to 50 per cent of £3,000. So, you’d pay £1,500 on account in January and £1,500 on account in July.
Payments on account make paying your taxes harder the first year. This is because you have to pay your tax bill for that year and make a payment on account. But once you're over that hump it's easier because you're always paying in advance. So, as long as you save as you earn, you won’t get caught out.
Can I reduce my payments on account?
Yes. You can reduce your payments on account if you think you’re going to make less money —and, so, owe less tax — next year, for example because you’re not working as much.
To do this:
Don’t have a government gateway account or would rather revise your payments on account by post? You can do this by sending form SA 303.
Remember, if you underpay on your payments on account, you may get fined and charged interest if HMRC thinks you’ve acted negligently or fraudulently. But, if you overpay, you can claim a refund. For this reason, it’s probably safer not to reduce your payments on account unless you’re absolutely sure your income is going to decrease.
Doing well and expect to owe more tax next year?
Unfortunately, you can’t increase your payments on account. Come 31 January, you’ll have to make a further payment in order to settle your tax bill in full. This is called a balancing payment.
Let’s say your tax bill is £5,000 in 2018/19. This means you have to make two payments on account for 2019/20 — £2,500 by 31 January and £2,500 by 31 July.
Now, let’s say your tax bill for 2019/20 is actually £6,000. This means you’ll have to make a balancing payment of £1,000 on 31 January 2021.
Do payments on account reduce HMRC tax penalties?
Payments on account and tax penalties are two separate issues.
A payment on account is due if your tax bill is £1,000 or over and you’re self-employed (or earn 80 per cent of your income from self-employment).
By contrast, a penalty applies if you fall foul of HMRC’s rules. Of course, one of those rules is that you have to make payments on account by 31 January and 31 July. So, if you miss those dates(or don’t pay enough), you’ll be fined. And you may also have to pay interest on the amounts due.
HMRC introduced a new penalty system in 2009. According to the new rules, you can be fined if:
- Your tax return is inaccurate
- You claim too much tax back
- Your payments on account are too low
- The tax return is filed late
- You don’t tell HMRC when you discover a mistake
You can also be fined for ‘lack of reasonable care’ or deliberately filing incorrectly.
As you’d expect, how much you’re fined depends on how serious your breach is.
That said, you can appeal a penalty. To do this, fill out an appeal form (HMRC will send one when they write to you letting you know you’ve been fined. You’ll also need the following information:
- Your name or your business name
- Your tax reference number
- What you disagree with
- Why you disagree with the tax decision
- What you believe the correct tax figures are
- How you calculated what you think is the correct tax figure
- Your signature
How are tax penalties calculated?
Penalties are based on the reason for the inaccuracy and the PLR (potential lost revenue).PLR is the extra tax HMRC would’ve collected if you had filed correctly.
HMRC states the following:
- If a penalty occurs because of a lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due
- If the error is deliberate, the penalty will be between 20 and 70% of the extra tax due
- If the error is deliberate and concealed, the penalty will be between 30 and 100% of the extra tax due
You also have to pay a penalty if you don’t notify HMRC of any changes in your liability, such as:
- Increased profits
- Corporation tax payments due
- Reaching a VAT threshold
- Sold assets, leading to Capital Gains Tax
- Becoming a business that charges Excise Duties
- Any other changes that affect what you will need to pay
Wrongdoing penalties exist if you:
- Charge VAT when you are not entitled to do so.
- Fail to pay relevant Excise duties
- Avoid paying the correct amount of Excise duty
- Do not declare offshore interests
How to check HMRC payments on account?
Once you’ve filed your tax return, HMRC’s system will automatically tell you how much tax you owe, whether you have to make payments on account and how much the payments on account are.
Then proceed to HMRC and sign in to your Government Gateway account. Select ‘View your Self-Assessment return’ and select ‘View Statements’. Now you have a clear view of what you’ve already paid and what is due.
The key thing to remember is that if you underpay, you may end up being fined and charged interest. And, if you overpay, you can claim a refund. So, think carefully before reducing your self-assessment payments on account.
Payments on account for the financial year 2019/2020 (ending 5 April 2020) are due on 31 January 2021 and 31 July 2020. These are the crucial dates to remember for your upcoming self assessment tax payments.
Don’t forget, if it’s your first year in business, you also have to pay tax on your total earnings for your first year of business as well as payments on account. A good accountant can help you if you have any questions.
