What is a Payment on Account and can it be reduced?

Is it Possible to Reduce your Payment on Account?

If you have recently received a statement from HMRC requesting a payment on account to be made by 31 July 2021, please read on to see if we can possibly reduce this for you.

By way of background, a payment on account is basically a way of paying your tax bill in advance. You pay your first instalment on the 31st January, with any balancing payment due from the year before. Your second payment is due at the end of July.

How do you calculate the payment on account?

This is calculated from your tax liability of the previous year and will be paid in equal instalments, so you will pay half in January and half in July.

This is assuming that you will make roughly the same income or more than you did last year. If you earn more and your tax liability increases then you simply pay off the balancing amount on January 31st.

Here’s an Example

Self-employed profits for 2020/21 were £18,000 and there was no other taxable income for the year. The total tax liability for 2020/21 was £1,100 and you are liable to make payments on account towards your liability for 2021/22 of £550 each – normally due on 31 January 2022 and 31 July 2022. (For simplicity, we have ignored Class 2 and Class 4 National Insurance).

On 31 January 2022, you will pay the balancing payment for 2020/21 plus the first payment on account for 2021/22, giving a total payment of £1,650.

The second payment on account for 2021/22 of £550 will become payable on 31 July 2022.

Can they be Reduced?

It may feel unfair paying a tax liability on money that you haven’t earned yet. Self-employment is not always easy to predict and income can fluctuate dramatically from year to year, especially in the current climate.

If you feel your income will be lower than the previous year you can reduce your payments on account with HMRC. You will need to explain why you are reducing your payments and can set a new amount that you intend to pay.

This is extremely helpful to those who, for whatever reason, are not seeing the same income as the year before. However, don’t be tempted to reduce your payments if business is maintaining or improving, as when you complete your next tax return you will still have that tax to pay and may end up with a bigger bill!

If you are unsure about your tax payment, feel you are paying too much or think you may struggle to make payment then please get in touch with us for assistance.

Haines Watts

We are fluent in Tax. If you have any concerns regarding personal or business tax please do give us a call. Our Tax Team our on hand to discuss your concerns and help both individuals and businesses ensure they make the most of tax saving opportunities. Give us a call to find out how we can help you.