Payments on account and balancing payments: a guide

By the time you read this, HMRC should already have taken your second payment on account from your bank account. That’s because the deadline for this instalment of income tax and national insurance (NI) contributions due on last year’s profits, was 31 July.

In theory, payments on account were introduced to simplify things. They would help self-employed people to put away money, so that the tax bill wasn’t such a shock for those who always seemed to forget that they would need to pay tax on their income. They also provided HMRC with much needed cashflow.

In reality, ‘payments on account’ and their bed-fellow ‘balancing payments’ confuse so many people that they are the aspects of self-assessment we are asked about most frequently.

In light of this, we’ve written this brief guide to what they are and how to reduce them.

What are payments on account?

‘Payments on account’ are advance payments towards your tax bill, including class 4 NI contributions you’ll owe for that tax year. They do not include any liability for student loans or capital gains tax.

Who needs to make them?

Anybody who files a self-assessment tax return and has an income tax bill of more than £1,000, although there are exceptions.

What and when to pay

Each payment is half your previous year’s tax bill. You pay the first half on 31 January and the second on 31 July.

What is a balancing payment?

A ‘balancing payment’ is the difference between the amount you’ve paid on account and your actual tax bill. This will be due on 31 January after the end of the tax year.

If your actual tax bill is lower than you’ve paid on account, we can ask HMRC for a refund.

How can you reduce payments on account?

There are a number of ways:

  1. reduce your taxable profits
  2. increase your business expenses
  3. find tax reliefs you may not be aware of

Whilst reducing profits may not seem an obvious choice to many, we can help with all of these in ways that are compliant, coherent and cost-effective for you and your business.

Call us now on 01392 875 391, email enquiries@mjsmith.co.uk or complete our contact form to find out more. We are here to help ! Accountants : Exeter

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