Understanding those ‘payments on account’

Payments on account

The tax that you have to pay by 31 January is the tax due on earnings in the tax year from 6 April to the following 5 April.

In addition HMRC require a further ‘payment on account’ which equals 100% of the tax that you paid during the year 6 April to 5 April in two installments. The first installment has to be paid by 31 January aswell as the tax due for the year. In effect this is a payment towards the current year. The second payment is due 31 July.

How is this calculated

You’ll have to make payments on account if your previous year’s tax was over £1,000 – unless more than 80 per cent of the previous year’s liability was covered by tax taken off at source (i.e CIS or PAYE)

What happens to these payments

The payments on account that are made are held in your account with HMRC and are offset against the next tax return due. So if your tax bill was £2000 for the year ended 5 April 2011, you would pay £3000 on 31 January 2012 (the total tax due and a further 50% of the total tax due towards next year) and then a further £1000 on 31 July 2012. When assessing your tax for the year 5 April 2012, you have already paid £2000 towards the next bill.

Can this be adjusted

If your circumstances have changed and the projected earnings for next years tax return have reduced, or you have tax deducted at source, your accountant can make an application to reduce these payments for you. And if you want to pay more, this can also be arranged.