Everything you need to know about payments on account with HMRC
Did you know that you can make payments on account with HMRC? It’s something more and more people to spread their personal tax bill over the year.
Is it the right solution for your situation? Panthera looks into the scheme and how it works.
Not one payment, two payments
There are two payments - you pay half of your tax bill as one instalment and what remains is paid at a later date. It sounds straight forward enough but there are lots of little catches you have to watch out for if you’re on the scheme.
How it works – an example
Your first payment is due by midnight on the 31st January. Your second payment must be made by 31st July at midnight.
Let’s assume we’ve done your tax bill for 2015-2016 and we’ve told you that you owe HMRC £40,000, just like the last three or four years beforehand. Because your instalments are calculated using your previous year’s tax, £20,000 of that would be paid on 31st January with the balance being settled on the 31st July. That’s all fine because you’ve paid the same amount of tax for years.
The next year however, you’re doing a bit better and for 2016-2017, we work out your tax bill as £50,000.
So, the instalments that you pay will stay at £20,000 in January and £20,000 in July because that’s what you paid in 2016-2017. But you’re also due to pay £10,000 more because you’ve made more money in 2016-2017.
The additional amount is called the “balancing amount”. This balancing amount must be paid by 31st January 2018.
What does the payment schedule look like?
In 2015-2016, you built up £40,000 worth of taxes and the following year, that was £50,000.
In 2017, your first payment on 31st January 2017 would be £20,000 (50% of the tax from 2015-2016). Your second payment would be on the 31st July 2017 also for £20,000 (the remaining 50% of the tax from 2015-2016).
In 2018, your first payment would the £10,000 balancing payment (the difference between the amount paid in 2017 and the total tax due for 2016/2017) plus £25,000 (50% of the tax from 2016-2017), giving you a grand total of £35,000.
Your second payment would be £25,000, the remaining 50% of the tax from 2016-2017.
Panthera tip – if you’ve already paid 80% or more of the total tax you owe or your self-assessment bill came in at £1,000 or less, you don’t have to make two payments in the year.
You can adjust the levels of your payments, but should you?
Businesses have good years and they have bad years.
If this year has gone a lot worse than the previous year (and remember that payments are based upon the previous year’s tax bill), you can apply to HMRC to have your Payment on Account reduced.
This will buy you time to get the business back up to its former trading levels or, better still, even higher.
However, there is a danger in this. Business might not pick up as fast as you want and you could be left with unmanageable tax payments. If you make an underpayment, this will attract interest on the outstanding amount and this will really push up your financial obligations to HMRC.
Take advice – it’s why we’re here
If you want any help with self-assessment, paying taxes, or you want to find out more about Payment on Account, just give us a call on 01235 768 561 or email us at firstname.lastname@example.org.