What are HMRC payments on account?

Proportion
Categories: Self Employed, Tax

Helping you understand HMRC tax payments on account.

If you are self-employed or pay tax via self-assessment then you may come across the joy that is HMRC payments on account for tax. We know how confusing they can be as we answer questions about them all the time. This article is designed to go through exactly what HMRC payments on account for tax are and hopefully help you understand why HMRC are asking for more tax money than you thought.

What are payments on account?

Those who pay tax via self-assessment pay tax considerably later than those who pay via PAYE (Employment).  This means that poor old HMRC must wait for their money!  So HMRC don’t lose out and have to wait too long, they came up with an advance payment system called Payments On Account (POA).  This is designed to bridge that gap between when employed people pay tax compared to those who are not employed.

How do POA’s work?

They don’t apply to companies just individuals which includes those with rental income and the self-employed.  They also don’t apply if you owe less than £1000 in tax.

When you owe more than £1000 in tax via self-assessment HMRC require you to pay the same amount ready for the following year.  In their generosity they do split it over two payments being 50% January and 50% in July.

When your tax is worked out for the next tax year the POA’s are taken into account and allocated against the tax you actually owe for that year.  New POA’s are then calculated for the next tax year.

What if I’m not going to owe that much tax next year?

The POA’s can be adjusted and reduced if you think your tax due for the following tax year will be less.  No proof is required but if you lower the amounts too much HMRC will charge you interest on any underpaid amount back to when the original POA should have been made.

Can you show me how it works?

That’s fine.  Lets assume we have someone who has prepared their 2018 tax return owes £1500.00 tax based on their profit from their self-employed business.  That is their only source of income.

Tax Due for 2017/18 due 31 January 2019£1500.00
Payments on account calculation Amount per POA =
£1500 x 50% =
 £750.00
Total Due 31 January 2019
2017/18 Tax due
1st POA for 2018/19

£1500.00
£750.00
Total due 31 January 2019£2250.00
Total Due 31 July 2019
2nd POA for 2018/19

 £750.00

Then as we move to doing the 2018/19 tax return

Tax due for 2018/19
Less: POA’s already made
£1600.00
(£1500.00)
Balance due to HMRC* by 31 January 2020£100.00

*From here new payments on account would be calculated for the 2019/20 tax year as below

Payments on account calculation Amount per POA =
£1600 x 50% =
 
£800.00
Total Due 31 January 2020
2018/19 Tax due
1st POA for 2019/20

£100.00
£800.00
Total due 31 January 2019£900.00
Total Due 31 July 2020
2nd POA for 2019/20
 
£800.00

What can I do to know how much I owe in advance?

Sadly HMRC payments on account are here to stay for the foreseeable future so the best you can do is make plans in advance to know how much you owe and when.  We would recommend at the minimum you ensure you complete your tax return prior to 31 July each year, giving you the opportunity to reduce your July payment if you are likely to owe less tax.  However, if you are self-employed a better situation to be in would be to know how much tax you are likely to owe at any time during the year.  For this, we would recommend using a bookkeeping app such as Xero, Quickbooks Online or Freeagent which will help you keep track of your profits and therefore giving you the opportunity to calculate how much tax you are likely to owe before you even get to the end of the tax year.

Feel you would benefit a proactive, a helpful accountant like us?  Book a discovery call and we can have a chat about how – Discovery Call

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