An individual may have to pay their income tax in advance when:
- their income tax liability is greater than £1,000, and
- less than 80% of the tax liability is collected by Pay As You Earn (PAYE).
Instead of just paying your income tax liability by 31st January, you will be required to make two additional tax payments per annum, these are known as payments on account.
For example, following the submission of your 2022/23 tax return you will need to make the following payments:
- 31st January 2024 - Balancing payment due for 2022/23
- 31st January 2024 - First payment on account due for 2023/24
- 31st July 2024 - Second payment on account due to for 2023/24
The amounts to pay in advance of your 2023/24 tax liability are calculated based on your tax liability (excluding capital gains) for 2022/23. Half of this is paid by 31st January, and the other half by 31st July.
It is possible to ask HMRC to reduce the amounts payable, as long as you have a reason. For example, you may be aware that your income is going to reduce significantly due to a change in your circumstances. HMRC form SA303 can be completed, or you or your accountant can apply online.
Furthermore, if your tax return has been prepared by 31st July you will be aware of your actual tax liability and can therefore pay the correct amount at this date, rather than the estimate.
There is therefore an incentive to get your tax return prepared and submitted earlier!
If you do reduce your payments on account, and your tax liability ends up being higher than your reduced amount HMRC will charge interest on the underpayment.
If you are expecting an increase in your tax liability compared to the previous year, there is no need to increase your payments on account.
If you are new to self-employment and are expecting your tax liabilities to rise it’s important to discuss this with your accountant so you are prepared for the payments. It can be a shock when you haven’t made payments on account before to then have to pay another amount of tax.
Date published 8 Nov 2023This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
Catherine Heinen, FCCA
Catherine is a Technical Content Writer at TaxAssist Accountants, and a qualified accountant. With experience working at two accountancy practices in the UK top 50 accountancy firms according to Accountancy Age, Catherine has significant experience in accounts, tax returns and advising clients. Catherine ensures businesses, business owners and individuals are kept up to date and informed by providing concise and informative technical material.
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