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Payment on account.
It’s the bit they don’t tell you about.
So I am. Because I like you having lovely surprises and not big tax bills you didn’t expect.
Payment on account is HMRC trying to help you spread the cost of your tax bill.
Yes they are trying to make it easier for you.
Payment on Account is an advance payment towards your tax bill so you’re not whapped with a whopper once a year.
It’s only when it happens that they ask you to pay 18 months at once that it can be a shock – and I’ll get to that later.
You need to pay in 2 instalments.
By paying in 2 instalments you help to spread the cost of your tax bill.
It’s the same principle as why employees pay tax very pay packet and not all at once. Our finances work differently if we’re self employed so for us, it’s twice a year.
You do your tax return and your tax bill is £10,000.
Your first payment is 50% and needs to be paid by 31st January. That’s £5,000 due by 31st January.
The second payment of £5,000 will need to be paid by 31st July. Simple.
(Remember, paying tax is always your goal as it means more profit and more money. Of course you’ve also done what you can to reduce your tax bill legally and ethically).
We pause for a cup of tea and a fairy cake.
So we know that you have to pay in 2 instalments.
You marked them with a big star in your diary/calendar so you can plan.
If your tax bill for the previous year was less than £1,000 then you won’t have to make payment on account.
(NB. That £1000 limit can change)
Make a note that when your income rises above £1000 tax due, you will need to pay Payment On Account. More income and a bigger tax bill is always better. It’s more money in your pocket.
Maybe it’s your first year in business, maybe you paid less than £1000 in tax before.
This is when doing your tax return earlier and saving 30% for tax really pays off.
The first time Payment On Account applies to you, HMRC will ask you to pay 150%. This can be a shock if you’re not expecting it.
So you’re in your first year of self employment or your first year of full time self employment and tax due for the previous tax year is £10,000.
HMRC will ask you for £5000 for Payment On Account (50% of £10,000).
Your total tax bill will be £15,000.
HMRC expect you to pay this by 31 January (can you see why doing your tax return much earlier is a good idea now?)
The good news is that next year’s tax bill will be lower.
I can’t wave a magic wand and make your tax bill go away. What I can do is tell you about Time To Pay which is what you ask HMRC for if you need time to pay all your tax.
They are much more amenable to saying yes if you ask for reasonable installments over a reasonable amount of time and it isn’t January.
When your profits are lower and your Payment On Account is higher than your tax bill will be, ask HMRC to reduce your payments.
As always do not panic!
What’s your experience of Payment on Account? Tell me in the comments.