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Facts you may not know about payments on account

My business isn’t doing as well as last year can I reduce my Payment on Account?

Roy Jackson, Agricultural Partner at Whittingham Riddell explains: “

Self-Assessment is the bane of many self-employed people’s existence. The annual rush to get your tax return in on time, only to be presented with a whopping great bill, is one of the least entertaining parts of the year.

Payment on Account is one of the most commonly misunderstood elements of the Self-Assessment process. Although it was devised as a way of helping self-employed people spread out their tax bill, it often results in increased financial hardship for those who are already having difficulty paying.

It is calculated by looking at your previous year’s tax bill, and is due in two instalments.

The Payment on Account can be thought of as a way of paying off some of your tax bill in advance. The first instalment is due on 31 January (the same day as your ‘balancing payment’, which clears your tax bill for the previous tax year), and the second is due on 31 July.

So, if you paid £10,000 in the tax year for which you are filing your return, you will make the first Payment on Account of £5,000 on 31 January, and another payment of £5,000 on 31 July. This will include Class 4 National Insurance Contributions where applicable, but not student loan repayments or Capital Gains Tax.

Self-employed peoples’ income can fluctuate from year to year. If you think that your income for the next tax year will be lower than in the previous tax year, you can apply to have your Payment on Account reduced.

You can reduce Payment on Account by logging in to your online HMRC account and clicking ‘Reduce payments on account’. Or, you can send form SA303 to your tax office.

In practice, many people choose to do this if they are having trouble paying their tax bill. Some individuals reduce their Payment on Account, presuming that they will be in better financial shape later, and will therefore find it easier to settle the remainder of their bill.

You should think carefully before doing this. Remember that, if your income is the same or higher in the next tax year, you will still have to pay the same amount.

All you are really doing is delaying the pain, rather than eliminating it altogether. It is also important to note that underpayments will be subject to interest. If you reduce your Payment on Account and it subsequently turns out that you have underpaid, you will have to pay interest on the outstanding amount. This can significantly increase your tax bill.

If you would like some further advice on how this may work for you please contact us here

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