The deadline for self-assessment tax returns is the 31st of January. Using the current deadline, it will mean that you are paying tax for the financial 2020/21 financial year. Once you have received your tax calculation, you will understand how much tax you need to pay for this year. However, along with the amount of tax you need to pay, you will also see additional payments that have to be made which are known as “Payments on Account”.
Payments on Account
You will be expected to make payments on account for the current tax year which is 2021/22. This is applicable if your tax and class 4 National Insurance liability for the 2020/21 tax year was a minimum of £1,000. However, this is not applicable if you paid a minimum of 80% of what you owe which falls under deduction at source and an example of this is PAYE.
Payment on Account – How it is Calculated
When it comes to determining your payments on account for the existing financial year, you need to begin with your tax and Class 4 National insurance liability for the previous tax year. In this example, that would be 2020/21. HMRC will assume that you have the same liability each year, and so, the amount that is collected will be the same as the previous year.
Each payment on account that you make will be 50% of the amount of tax and Class 4 National Insurance liability that you paid during 2020/21. It is important to note that Class 2 National Insurance contributions are not considered when calculating the amount to pay.
So, you will be expected to make the 50% payments on account by the 31st of January and the 31st of July after the current tax year which in this example, is 2021/22.
Should the final amount of tax that you owe at the end of the current tax year (2021/22) be higher than the amount you have paid on account, you will need to pay that by the 31st of January after that tax year. In this case, that would be January 31st 2023 and would need to be paid along with Class 2 National Insurance that is owed for the year. Should your liability be lower than the amount you have paid on account, you can use this against future tax bills or you can have it refunded where possible.
Reducing Payments On Account
If you believe or know that your tax liability for 2021/22 (using this example) is going to be lower than the amount you paid in 2020/21, then you can make the choice to lower your payments on account.
There are a number of ways that you can inform HMRC that you want to lower your payments on account. You can do this by visiting your online personal tax account and selecting the option to “Reduce payments on account” while you can choose to complete the SA303 form which needs to be sent to HMRC. You can also inform HMRC through your self-assessment tax return by completing the “Other Information” box. Here you will need to provide the amount you want to pay and the reason for paying a lower amount.
However, one thing to consider is that if you reduce payments below the amount you will owe, you will have to pay interest on the difference between what you were expected to pay and the amount that you did pay.