What Contractors Need to Know about Payment on Account

Payment on account

It’s that time of year again, and if you have to make payment on account the 31st of July is the deadline for your second payment. For most contractors, this will match the payment they already made at the end of January, based on 50% of last year’s tax bill.

A Contractor's Guide to Self-Assessment: Click here to download>>

All the various payment deadlines can be difficult to untangle, so in this article we’re going to explain everything contractors need to know about payments on account.

What is a payment on account?

Some tax payers are required to make advance payments towards their tax bill, at the end of January and again at the end of July. This ensures that tax payers are not indebted to HMRC, and splits the cost over two payments, which is easier for some to manage than a single larger payment once a year.

If you have to make a payment on account, the amount you pay is based on last year’s tax bill, and then adjusted with a “balancing payment” once this year’s tax return has been filed.

Do you have to make a payment on account?

Was your last self-assessment bill more than £1,000?

Has less than 80% of the tax you owe been paid already, for example through PAYE?

If the answer to both these questions is yes, then you’ll need to make a payment on account. If you answered no to either one, then you don’t. It’s that simple.

 What are the deadlines?

31st of January

There are two payments that may be due by the end of January; the first payment on account for the current tax year, and the balancing payment for the previous year.

The balancing payment is the previous year’s tax bill, less the advance payments you made in January and July last year.  

The payment on account is an advance payment for the current tax year, based on 50% of the previous year’s bill.

31st July

If you made a payment on account in January, you’ll need to make a second one by the end of July. This is again based on 50% of the previous year’s tax bill. In total, your advance payments for the current year will match the previous year’s bill.  

What we’re calling the “current” tax year ended in April, but as the filing deadline is not passed you may not yet know what “this year’s” tax bill is at this point. We recommend filing your tax return as soon as possible after 5th April, as this will allow you to adjust your July payment on account based on your true liability.

Following 31st January

To complete the cycle, by the end of January the following year, you must make the balancing payment for the current year, and the first payment on account for the following year. As before, the following year’s advance payments will each equal 50% of the current year’s tax bill.   

 For example:

If John’s tax bill was £8,000 in 2016/17, £10,000 in 2017/18 and £13,000 in 2018/19, his payments on account for 2017/18 would total £8,000, based on his 2016/17 bill. He would then make further payments as follows:

payment on account

What if you pay less tax this year than last year?

Your advance payments are based on what you paid last year, and this could lead to an overpayment if you owe less this year than last. Any over-payment will be refunded after you submit your tax return.

If you know your tax bill will be lower than last year, you can apply to lower your payment on account, but be aware that underpayments are subject to interest so it’s only advisable to do this if you’re sure your bill will be lower.

 If you have any questions or if we can help in any way please contact our expert team on 01296 468 483 or email info@orangegenie.com.

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