The tax year end for Self Assessment is 5th April each year. The balance of tax due for that year is due to be paid the following 31st January. For the tax year end 5th April 2023, the tax will be due 31st January 2024.
When you receive you details of the tax you owe from your accountant, you may notice that in January you are not just paying your tax liability for the 5th April just gone, but also a payment on account.
The payment on account is calculated at 50% of the last year’s tax liability. If you tax for 5 April 2022 is £5,000, then one payment on account is £2,500.
Payments on account are due when you total tax liability is £1,000 or more. Any less than £1,000 and HMRC don’t require a payment on account. Also if you income is 80% or more taxed at source, for example an employed job paying PAYE, then you also don’t need to make a payment on account.
The payment on account goes towards next year’s tax liability. The payment made on 31st January 2023, will go towards 5th April 2023 tax liability.
There is also a second payment on account due by 31st July each year. A payment on account due by 31st July 2023 will also go towards 5th April 2023 tax liability, reducing the amount owed in January 2024.
HMRC collect these payments on account as you have already worked 10 months of the next tax year when your balancing payment is due. It helps them receive tax closer to when you are earning the income.
In your first year of Self Employment or if you have a surge in profits or income not tax at source, the payments on account can increase your first tax bill considerable, but over time these even out as shown below.
Working Example
Profits of £25,000 to 5 April 2022 taxed at 20% gives tax due of £5,000:
Tax due 31st January 2023
Balancing payment £5,000
First payment on account £2,500 (50% of tax liability)
Total £7,500
Tax due 31st July 2023
Second payment on account £2,500
If profits and tax rates remain the same for 5 April 2023:
Tax due 31st January 2024
Balancing payment £0 (£5,000 less the two previous POA of £2,500 each)
First payment on account £2,500
Total £2,500
Tax due 31st July 2024
Second payment on account £2,500
What happens if my profits are down this year?
If your profits drop after 5th April, and the following 5th April you expect them to be lower you can claim to reduce the payments on account. However if your profits turn out to be the same and you lowered your payments on account then HMRC will charge interest for the difference.
