A Payment on Account (PoA) is an advance payment towards your tax bill in the UK. It helps spread the cost of your tax liability, so you don’t have to pay a large sum in one go. This system is primarily used by self-employed individuals, but it can apply to others with significant untaxed income, such as from investments or rental properties.
Let’s see the payment on account of how it Works
Each Payment in Account is half of your previous year’s tax bill, excluding student loan repayments and Capital Gains Tax. These payments are due in two installments:
- First installment: 31 January (during the tax year)
- Second installment: 31 July (following the end of the tax year)
Example: Imagine you are a self-employed graphic designer with a tax bill for the 2022-2023 tax year of £4,000. Based on this, HMRC will calculate your Payments on Account for the 2023-2024 tax year.
Calculating Payments on Account
Your Payments on Account for the 2023-2024 tax year will be half of your previous year’s tax bill (excluding student loan repayments and Capital Gains Tax).
- Previous year’s tax bill (2022-2023): £4,000
- First Payment on Accounts (due 31 January 2024): £2,000 (half of £4,000)
- Second Payment on Accounts (due 31 July 2024): £2,000 (half of £4,000)
Total Payments on Account
By the end of the 2023-2024 tax year, you will have made two Payments on Account totaling £4,000.
Balancing Payment
After the end of the tax year, you’ll need to complete a self-assessment tax return. This determines your actual tax liability for the year. If your tax bill exceeds the total of your Payments on Account, you must make a “balancing payment” by the following January 31st. If your tax bill is lower, you can receive a refund or have the difference credited to your next Payments on Account.
Do You Have to Pay It?
You must make payments on account if:
- Your previous year’s tax bill was more than £1,000, and
- Less than 80% of your income tax was collected at source.
If you feel your income will be much lower this year than the previous year, you might seek to have your Payments on Account reduced. However, be cautious because underpaying may result in interest and fines.
How to Pay Payments on Account?
Paying your Payments on Account is straightforward, with several methods available to ensure you meet the deadlines and avoid any penalties.
- Online or telephone banking
- Direct Debit
- Debit or credit card online
- CHAPS
Payments on Account are made on time and correctly allocated to your tax account. If you have any doubts or need assistance, contacting HMRC or a tax professional is recommended.
Conclusion
Payments on Account are a way to manage your tax liabilities in advance, helping to spread the cost over the year. If your previous year’s tax bill was significant and you fall into the criteria, it’s a mandatory process. Understanding this system and planning accordingly can help you stay on top of your tax obligations without any last-minute surprises. If unsure about your specific situation, it’s always advisable to consult with a tax professional or HMRC directly.