For self-employed individuals or those with additional income streams, the UK’s self-assessment tax system includes a concept called Payments on Account. These payments can often come as a surprise and may strain your cash flow if not planned for. In this blog, we’ll explain what Payments on Account are and how you can manage or reduce them effectively. If you’ve been searching for how to reduce Payments on Account, keep reading.
What Are Payments on Account?
Payments on Account are advance payments toward your next year’s tax bill. HMRC requires these to help spread the cost of your tax liability across the year.
How Do Payments on Account Work?
Understanding Payments on Account involves knowing the due dates, amounts, and final balancing payment.
1. Due Dates:
- The first Payment on Account is due by 31 January of the current tax year.
- The second Payment on Account is due by 31 July of the following tax year.
2. Amount:
Each Payment on Account is 50% of your previous year’s tax bill, excluding any capital gains tax or student loan repayments.
3. Final Balancing Payment:
If your actual tax liability exceeds the Payments on Account made, you’ll need to pay the remaining balance by 31 January of the following tax year.
Example of Payments on Account
For a clearer picture, let’s say your tax bill for the 2023/2024 tax year was £6,000. Here’s how it works for 2024/2025:
- 31 January 2025: First Payment on Account of £3,000.
- 31 July 2025: Second Payment on Account of £3,000.
- 31 January 2026: Any remaining balance based on your 2024/2025 tax bill.
Why Payments on Account Can Be Challenging
Many self-employed individuals and those with fluctuating income find Payments on Account difficult because:
- You’re paying for a tax year that hasn’t ended yet.
- Payments may be higher than necessary if last year’s income was unusually high.
- They can create cash flow issues, especially with irregular earnings.
How to Reduce Payments on Account
If your income is expected to decrease this year, you can apply to reduce your Payments on Account. Here’s how:
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Estimate Your Income:
Review your earnings to predict your current year’s tax liability. -
Submit a Reduction Request:
- Log into your HMRC online account and use the “Reduce Payments on Account” option.
- Alternatively, submit a paper form SA303.
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Provide a Justifiable Reason:
HMRC may request an explanation for reducing your payments. -
Be Accurate:
Underestimating your liability can result in interest charges on any shortfall.
Tips for Managing Payments on Account
- Plan Ahead: Set aside a portion of your income monthly to cover future payments.
- Use Accounting Software: Track your earnings and estimate tax liabilities to avoid surprises.
- Seek Professional Advice: Tax advisors, like Jungle Tax, can help you optimize your payments and cash flow.
Need Help with Payments on Account?
At Jungle Tax, we know how overwhelming self-assessment taxes and Payments on Account can be. Our team of chartered accountants and tax experts can:
- Accurately estimate your tax liability.
- Advise on reducing Payments on Account.
- Provide strategies to improve your cash flow and tax planning.
Contact Jungle Tax today at 0333 880 7974 or visit our website. Let’s make taxes less taxing!