Payment on account is a system that is used by the revenue to ensure that taxpayers under Self-assessment pay towards tax and national insurance for the next tax year.

The amount of payment on account applied for the taxpayers is based on previous tax years due to the HMRC

Illustration of Payment on Account.

Jane is a hairstylist and started trading on the 6th of April 2018. She registers herself for self-assessment as a sole trader. Her tax and national insurance due to HMRC is £1000. The HMRC would add £500 on top of the tax that she is due to pay on the 31st of January 2019. The HRMC also expects Jane to pay £500 to them by the 31st of July 2019.

This £500 addition is based on the assumption that Jane would owe HMRC the same amount next tax year 2019/20.

This amount would be adjusted annually when the returns are submitted.

Payment on account

Is it possible to be under Self-assessment and not make a payment on account?

There are some taxpayers that are exempted from making payment on account. 

These are taxpayers that are employed and pay tax through PAYE.

The condition for this is that at least 80% of tax is deducted through PAYE.

The main reason for this exemption is because their tax codes are usually adjusted to reflect on their income through self-assessment.

Illustration 2 on Payment on Account

Alwyn is an Architect, she works for Bandit Industry limited. She earns £50,000 a year.

She also advises clients in her spare time, mainly on the weekend. Therefore, she receives some payment from Self-employment.

She has registered for self-assessment to declare  £10,000 she has received from her freelancing activities.

The tax Alwen would have paid through PAYE in 2018/19 is £7630 as shown below, which is more than 80% of the combined tax due shown.

Income from Bandit Industry    £50,000

Income from Freelancing           £10,000

Total Income                                  £60,000

Less Personal allowance             £11,850

Total taxable Income                  £48,150

Tax at 20%     £34500 * 20%         £6,900

Tax at 40 %    £13,650 *40%           £5,460  

Total due                                             £12,360

Tax already paid                              £8360

 Net due                                             £4000

 

Payment on account

What about if I am earning less tax in the current tax year?

A taxpayer can inform HMRC if they would like to reduce their payment on account.

This can be done whilst submitting their returns and calling HMRC afterwards.

HMRC would adjust the payment to reflect in the income stated by the taxpayer.

However, if this is not accurate, interest would be added to the payment due.

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