Submitting your Self Assessment tax return can be a complex process, and many small business owners struggle with understanding their tax bill. This article aims to provide clarity on payment on account fees, including what they are, how they work, when they need to be paid, and how to avoid overpayment.
What is Payment on Account?
Payment on account refers to the fees you pay towards your self assessment tax return twice a year. This system, designed by HMRC, helps businesses manage their tax payments effectively. The amount you pay is calculated based on your previous year’s tax return, with payments made in two instalments per year. To determine the instalment amount, simply halve your previous year’s tax bill. However, as business earnings and expenses can vary, there may be a need for a “balancing payment” if the payments on account don’t cover the current year’s bill. If your tax bill is less than £1,000, you won’t need to make payments on account.
When Do I Pay?
There are important deadlines to keep in mind for payment on account. The first instalment is due by midnight on January 31st each year.
How Does HMRC Payment on Account Work?
Let’s illustrate how the payment on account system works with an example. In your first year of trading, if HMRC calculates a tax bill of £500, which is due by January 31st of the following year, you won’t be required to make payments on account since it falls beneath the £1,000 threshold. However, if your tax bill for the next year is £2,000, you would need to pay a payment on account fee of £1,000 in addition to your tax payment. This would result in a total payment of £3,000 in January, with a further £1,000 due by July 31st. Conversely, if your profits in the third year decrease, for instance, resulting in a tax bill of £1,800, you would be refunded £200 the following January. Subsequently, your first and second payments for the next tax year would be £900 each.
How Do I Reduce Payments on Account?
Many business owners find that the advance payments on account are often overestimated. If you anticipate a lower tax bill than the previous year, you can request to reduce your payments on account. To do so, log into your HMRC account, select “view your latest self-assessment return,” and then choose “reduce payments on account.” Complete either an online form or a form to send by post. However, be cautious as miscalculations may result in underpayment, requiring you to make up the difference and pay interest on the outstanding balance.
We hope this guide has provided you with a clearer understanding of payment on account and what it entails. If you continue to struggle with this concept, consider seeking assistance from an accountant who can manage the process for you. Alternatively, if you prefer managing your small business finances independently, explore Sage Accounting software to streamline your operations and maximize profitability.