Payments on Account
Why have I been landed with another bill from HMRC?
I paid £18k in January and now they want another £6k? This is question has been asked by a number of new clients that we have onboarded over the past few months, so hopefully this blog post should help explain why HMRC want a payment in July as well as January.
Payments on account are advanced payments for personal tax based on the previous years bill. Half is due in the January of the tax year with the previous years payment and half is due in the July following the tax year. That apply to taxpayers that have personal tax due over £1,000 and less than 80% of tax due is deducted at source.
Payments on account can be a surprise to people that are new to having to prepare personal tax returns, this particularly applies to sole traders when they receive their first tax bill is in effect for 18 months or to clients where they have a spike in income.
HMRC’s theory is that these payments help spread payment of tax and make it more in line with when income is received.
Using the example below, the first year’s tax due is £10,000 which is due on 31st January 2019, as this is over £1,000 an additional £5,000 is payable with this amount as a payment on account so the total tax payable is £15,000.
The next payment on account of £10,000 is then due again on 31st July 2019, so at this point £20,000 in total has been paid in tax, £10k for 2017/18 and £10k for 2018/19.
Following on with the diagram below the final tax due for 2018/19 is actually £12,000 less the £10,000 paid on account results in a balancing payment of £2,000 on 31st January 2020, add on £6,000 due on account for the next tax year results in £8,000 payable.
What can be done about payments on account?
Not a lot if your income is expected to be at the same level for the next tax year. However, if you think that your income is going to drop for the next year you can make an election to reduce them to an estimated tax amount. For example we had a client that took a large dividend to clear his mortgage, as the tax due on his next years dividends would be a lot less we made an election to reduce his payments on account so that he was not overpaying in advance.
What should I do if i don't understand my tax bill?
Firstly you need to speak to your adviser so that they can help you understand it, if not we will be more than happy to explain.