PAYMENTS ON ACCOUNT -SELF-ASSESSMENT
Scott Moreton ?
A specialist Contractor Accountant and FreeAgent Expert ? I help freelancers and contractors across a wide range of industries with accounting challenges and Making Tax Digital
Introduction
Payments on account -Self Assessment (SA) -what are these and how do they come about? When you complete your Self Assessment Tax Return each year your liability is calculated. You will also need to pay to HM Revenue & Customs (HMRC) `payments on account’ unless:
- your last SA tax bill is less than ￡1,000
- you have already paid more than 80% of all of the tax that you owe. For example through your tax code or because your bank has already deducted interest on your savings
Payments on account are based on the current year’s tax liability. They are split into two equal payments that add up to your current year’s liability. These are be paid on account in the future against the following year’s tax liability. The first payment is due by 31 January and the second by is due by 31 July.
Example
If your total income tax liability for 2018/19 is ￡15,000 this is payable by 31 January 2020. If you are required to make payments on account, the payments on account will be ￡7,500 each, These are due by 31 January 2020 and by 31 July 2020.
You can ask HMRC to reduce your payments on account (please see below). If you do not request any reduction they will assume that you will earn at the same rate in 2019/20 as you did in 2018/19.
When you are new to the contracting world the above may come as somewhat of a shock. This is how the system operates though and you should budget for this when you start out contracting.
Once you have made your first payments on account you will effectively be in credit with HMRC. Any `balancing payment’ will need to be made to HMRC by 31 January 2020. If it turns out that your liability is less than the ￡15,000 in the above example HMRC would refund any overpayment.
Therefore, if your actual tax liability in 2019/20 is ￡18,000 you would need to pay the additional ￡3,000 to HMRC by 31 January 2020. If your actual liability is ￡13,500 HMRC would refund the ￡1,500 overpayment to you.
- The above may seem a little confusing but your accountant should be there to help and guide you around this!
Please read the full article here.