Second year business owner asks:
When I’m paying my own self assessment tax bill in January, why am I also having to make payments on account for next year?
Acumenica answers:
HMRC expects you to have your tax bill paid almost “in-year” now. So POAs are expected in January and July, even although your tax return isn’t due until the following January and you won’t necessarily know how much is due.
Payments on account are advance payments towards your tax bill, based on your liability in the last tax year. The system is intended to split your tax bill over two payments, which for some may be easier than making a single large payment once a year. It also helps to ensure that tax payers are not indebted to HMRC, and it gives the public finances a mid-year boost.
You will need to make a payment on account if:
Your last Self-Assessment tax bill was more than £1000
and
Less than 80% of all the tax you owe has been paid already (for example through employee PAYE).
For the self-employed, contractors and limited company owners, this is pretty much everyone.
How much are the Payments on Account?
The POAs are generally set at 50% of the previous year’s self assessment liability. So, if your 2022/23 liability is £10,000, your 2023/24 POA will each be £5,000.
When are the Payment on Account due?
Your payments on account are due on 31 January and and 31 July in the year your tax year ends. So for the tax year ended 5th April 2024, POAs will be due on 31 January 2024 and 31 July 2024.
Can I reduce the Payments on Account?
You can. As a contractor or self employed person, it’s likely that your income can be quite variable, so if you think (or know) that your income, and therefore your tax bill, is going to go down, then you can reduce your POAs accordingly. Careful though: if you reduce your POAs by too much, when you file your return and the real liability is known to HMRC, payment will be required immediately, and interest will be charged.
The early years problem
A common problem new contractors and the newly self employed encounter is in the second year of trading, at the time when you are filing (and paying) your first return:
For example, if you are currently (in October 2023) preparing to file your first return (2022/23) which is due on 31 January 2024, you will not have made any POAs towards the liability so you will have to pay the full amount due. But to get you into the right cycle of payment, you’ll also have to pay 50% of this liability on 31 January 2024 as your 1st POA for 2023/24, and the same figure again on 31 July 2024. While this feels like you’re paying tax twice in the one year, bear in mind that you likely went up to two years without paying anything.
These issues, especilly the early years problem, can normally be resolved by early intervention and a bit of planning. The Acumenica team are on hand to help business owners with all tax matters, and operate on a NO SURPRISES basis, so you’re always going to know miles in advance what liabilities are coming over the hill. To arrange a no-obligation confidential chat, please complete the form on our Contact Us page or call 03330 166559.
