What you need to know Payments on Account and how to pay HMRC
Business can be quieter during the summer period. It’s tempting to make the most of time and focus on pipeline business or even clearing out in-boxes or dusty filing cabinets. HMRC, however, never slows down and there’s another deadline looming for self-assessment tax payers.
Don’t forget the next to watch out for is 31 of July – Payments on Account.
If you are unsure if Payment Accounts affects you or confused by when you pay first and second instalment let me explain. This blog clarifies who pays, who doesn’t pay and if you can reduce payments.
Are you registered under the self-assessment tax system?
The deadline of 31st of July is for the second instalment of the Payments on Account for the tax year 6 April 2016 – 5 April 2017.
What are Payments on Account?
‘Payments on account’ are advance payments towards your self-assessment tax bill and are paid in instalments, twice a year, helping you to spread the final cost.
Stay with me.
Who is expected to complete a Payment on Account?
When you register with the HMRC’s self-assessment tax system you are more likely to have to make payments on account. The payments on account are based on the previous year’s earnings if your tax bill for that year was higher than £1,000.
It’s worth noting a payment isn’t expected if your bill was less than £1,000* or unless more than 80% of it has already been deducted at source.
Anyone paying Income Tax could find themselves in the net, it’s not just the self-employed and businesses. If you’re unsure of your tax position it’s worth consulting a tax expert to help you fully understand your unique tax circumstances.
*After PAYE or other deductions at source.
How is each Payment on Account calculated?
HMRC will be expecting this year’s payment to be similar to last year’s. The reason for this is that HMRC presume your income will be roughly the same and that you pay the same amount of tax each year.
Realistically, the individuals and the small to medium size businesses I work with have fluctuating income and profits each year reflecting the ebb and flow of business and income. This is where my expertise in tax planning safely guides my clients.
Here’s HMRC’s working example:
Your bill for the 2016 to 2017 tax year is £3,000. You made 2 payments on account last year of £900 each (£1,800 in total).
The total tax to pay by midnight on 31 January 2018 is £2,700. This includes:
- your ‘balancing payment’ of £1,200 for the 2016 to 2017 tax year (£3,000 minus £1,800)
- the first payment on account of £1,500 (half your 2016 to 2017 tax bill) towards your 2017 to 2018 tax billIf your tax bill for the 2017 to 2018 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2019.
Can the Payment on Account be reduced if income is down?
At times, clients come to me asking if they can reduce their payments on account until their financial position is more stable.
The answer is yes, but this option must be managed carefully and you must seek expert advice first. If a payment is reduced by too much there’s a risk of interest charges and late payment fines.
When is the time right to reduce a Payment on Account?
Using sophisticated Cloud accountancy software allows me to assess accurately the individual tax circumstances and financial position of every client. The result is I can advise on the right course of action to take today to safeguard the financial future.
If income is down I can effectively and safely reduce payments on account until my clients are in safer financial waters.
Put simply, there is no need to pay more than you have to.
The sooner you call the better if you are considering reducing your payment on account or looking for clarity about your unique tax circumstances. The 31st of July deadline is almost upon us.
Contact Bruce Wilson, on 0141 290 0262 or email Bruce@muwca.co.uk
Follow me on Twitter @brucewilsontax for handy tax tips and updates.
Until next time
Best wishes
Bruce Wilson,
Tax Specialist