Payments on account

Ian Pessell FCCA profile picture

In this week’s Money Matters – Ask the Experts column from Goldwyns Accountants, based in Southend, Ian Pessell, FCCA, a director and chartered-certified accountant at the company, considers why HMRC asks for payment in advance and offers some tips.

Dear Goldwyns - Why are HMRC asking me to pay tax for next year?

Ian Pessell explains:
If you have a balance of tax to pay for the 2016/17 tax year (i.e. year ending 5 April 2017) the deadline for payment will be 31 January 2018, 10 months after the end of the tax year. HMRC believe the tax system should collect tax due sooner than this, so usually require taxpayers in self assessment to make two payments on account. HMRC assume your tax due each year will stay the same, so set the payments on account at 50% of your previous year’s tax bill.

You will  be required to make the first payment on account  for the 2017/18 tax year at the same time as you pay the balance of tax owed for 2016/17 (31 January 2018). This is followed by a second payment on account on 31 July 2018.

The January payment on account arises 10 months into the tax year to which it relates and the second one in July arises 4 months after the tax year. So, in reality, no tax is being demanded in advance of the tax year to which it relates.

Take John as an example. Let us suppose that John has not previously been in self-assessment but has a £1,200 tax bill for 2016/17. The whole amount will be due on 31 January 2018 plus another £600 (£1,200 x 50%) payment on account – making the total due on 31 January 2018  £1,800.  On 31 July 2018 he will also be required to pay a second £600.

Fast forward to this time next year, and John finds that his 2017/18 tax return indicates that his total liability for that year amounts to £1,400. As he has already paid £1,200 on account (£600 each in January and July 2018), he must pay a final £200 for 2017/18 by 31 January 2019.  With this goes his first 2018/19 payment on account of £700 (£1,400 x 50%), another £700 will be due in July 2019, with the balance in January 2020 and so on.

As with all taxes, the best advice on how to deal with your tax affairs will depend on your individual circumstances, so you need to ask your professional advisors for guidance on your particular situation. However, there are some key points which commonly apply.

Payments on account are not required where the total liability is less than £1,000 or where over 80% of income is subject to PAYE or other direct deduction.

Tip 1: Subject to limits and conditions, taxpayers with PAYE income may ask for their year-end tax to be collected under PAYE. This can avoid both the on-account regime and provide extended credit stretching up to 15 months after the normal payment date.

Tip 2: You may reduce the payments due if you believe they will exceed the actual tax bill for that year, but care should be taken in making such a claim because of the potential interest cost of getting it wrong.

Tip 3: The payment regime can create nasty shocks for taxpayers whose bill increases materially over the previous year or exceeds £1,000 for the first time. So, my tip is to prepare, as early preparation of your tax return avoids nasty surprises.  

This article was first published in the Southend Echo on 28 November 2017.