If you’ve started working as a sole trader, landlord or business owner in 2016/17, you might be unfamiliar with the payments system for your self-assessment tax return.
Rather than paying your entire tax bill in one go, you’ll be required to make 2 advance payments over the course of the financial year, known as payments on account.
For tax bills that apply to the 2016/17 tax year, the first payment on account was due by midnight on 31 January 2018.
The deadline for the second payment is fast approaching, at midnight on 31 July 2018.
Who needs to pay?
Anyone with a self-assessment tax bill of more than £1,000 will need to make payments on account before the end of the month.
You don’t have to make a second payment on account if you’ve already paid more than 80% of the tax you owe for 2016/17.
This could be the case if you are employed and already paying tax through PAYE, or if your bank has already deducted interest on your savings.
How does it work?
Assuming you’ve done this, the remaining £5,000 owed on your earnings needs to be paid by midnight on 31 July 2018.
You make 2 payments on account every year, which are each half of the previous year’s tax bill.
If you still have tax to pay after you’ve made both of these, you’ll need to make a balancing payment by 31 January the following year.
If you’re preparing for your first year of payments on account, HMRC will expect you to pay 150% of your tax bill.
For example, you owe £10,000 on earnings between 6 April 2016 and 5 April 2017.
You need to have paid this in full by 31 January 2018, plus £5,000 as an advance payment for your next tax return the following January.
Consequently, when it comes to filing your return for the next financial year, £10,000 will have already been paid.
After the first year, if your profits and tax rates never changed, you would pay the same amount every January and July as your payments change when your profits do.
Any student loan repayments or capital gains tax will not be included in payments on account, and will instead be part of your balancing payment.
How to pay
You can pay using one of the following methods:
- online or telephone banking
- by debit or corporate credit card online
- at your bank or building society
- direct debit
- by cheque through the post.
For most of these methods, you’ll need to have your 10-digit Unique Taxpayer Reference to hand.
This can be found via your online account or on your paying-in slip if you currently get paper statements.
What happens if you overpay or underpay?
HMRC will send you a tax rebate if you’ve paid more tax than you need to or if your profits change.
On the other hand, if you haven’t paid enough or if you pay late, you’ll be charged interest of 3% on the unpaid tax from when the payment is due.
Reducing your payment on account
The advance payments you make are based on your previous year’s tax bill.
However, you might be expecting this year’s tax bill to come to less than the bill for last year – for example, if your income decreases, or if the amount of tax relief you’re entitled to increases.
If you know your tax bill will be lower than the previous tax year, you can make a claim to reduce your payments on account.
This can be done through your online HMRC account, or through a SA303 form.
Speak to us about payments on account.