Many taxpayers often overlook the ‘payment on account’ system. In this article, we aim to shed light on when you should be making your ‘payment on account,’ to HMRC, dissecting its essence, its bearing on your financial well-being, and the important timelines to bear in mind.
What Is a Payment on Account
What does ‘payment on account’ imply? This tax payment method, tailored primarily for self-employed individuals in the UK, allows taxpayers to make advance payments towards their annual tax bill, including Class 4 National Insurance if they are self-employed. The payments are due twice a year – on 31st January and 31st July. The overarching principle behind this system is the concept of “paying as you earn” to dodge the bullet of a hefty end-of-year tax bill.
The Weight of Payments on Account
Why are these payments significant? They smooth out the financial turbulence of handling a hefty annual tax bill. By bifurcating the tax into two payments spread throughout the year, the tax bill metamorphoses from a financial burden to a manageable obligation.
To Pay or Not to Pay: That is the Question
Is it imperative for you to make a payment on account? The answer lies in the labyrinth of your unique tax circumstances.
Decoding If Payment on Account Applies to You
How can you figure out if this applies to your situation? Here’s a compass to guide you:
- If your tax bill skyrockets beyond £1,000, after deducting tax at source and tax credits, you’re likely required to make advance contributions. This scenario is a common narrative among self-employed individuals grappling with their tax liabilities.
- When less than 20% of your tax is deducted at source, say through Pay As You Earn (PAYE) on your salary or pension, you’ll need to arrange for payments on account.
The Exceptions to the Rule
Are there exceptions? Indeed, if over 80% of your tax is already deducted at source or your tax bill dips below £1,000, you’re typically off the hook. Also, if you anticipate a drop in your income in the subsequent tax return, pulling it beneath the payments on account threshold, you can opt nfor an exemption on your tax return.
When Should You Make Your Payments?
Are there specific deadlines to make these payments? The dates are etched in stone: 31st January and 31st July each year. The January payment settles any balance from the previous tax year and initiates the first contirbution for the current tax year. The July payment constitutes the second installment on account for the ongoing tax year.
Though payments on account predominantly pertain to self-employed individuals in the UK, they shed light on effective financial management strategies. They underscore the essence of timely, planned payments to balance cash flow and mitigate financial stress. Whether you’re a business owner, an entrepreneur, or an individual aspiring to enhance your financial health, grasping and applying the principles of this system can be a game-changer, its important to contact an acocunt to discuss your circumstances and requirements.
Q1. Can you simplify what a payment on account means?
It is a method of collecting tax in the UK, designed primarily for self-employed individuals. It constitutes advance contributions towards your annual tax bill, made biannually – on 31st January and 31st July.
Q2. Who needs to make payments on account?
If you’re self-employed and your tax bill exceeds £1,000.
Q3. When are payments on account due?
Twice a year. The first payment is due by 31st January, which settles any remaining balance from the previous tax year and the first payment on account for the current tax year. The second is due on 31st July, making up the second payment for the ongoing tax year.
Q4. Are there any exceptions to the payments on account rule?
Yes, if over 80% of your tax is deducted at source or your tax bill is less than £1,000, you are usually exempt.
Q5. What is the main purpose of payments on account?
They aim to ease the financial strain of paying a large annual tax bill by splitting it into two manageable payments throughout the year.