What is a second payment on account?
If you are self-employed, you will be very familiar with the 31st January deadline for submitting your tax return and settling your ‘first payment on account’.
However, you may not be so familiar with the ‘second payment on account’ date within the tax year – 31st July.
If you do freelance work or have any income outside PAYE, you may need to make advance payments on account towards your current year’s tax bill. Not everyone will need to make payments on account, but you should find out if you need to, as the 31st July date is fast approaching and penalties will apply if you don’t meet the deadline.
Do I have to pay a second payment on account?
If your last self-assessment tax bill came to more than £1,000 then you will be required to make payments on account.
You are exempt from making payments on account if over 80% of your annual tax bill is deducted at source through your tax code (e.g. if you are PAYE). E.g. if you have a total tax bill of £10,000 for 2023/24, £8,200 of which is paid via your salary, you will just need to make one payment of £1,800 in January 2024, and no payments on account as 82% of your tax is paid at source, through your salary.
You can check what you owe by logging onto your personal tax account online with your Government Gateway ID and viewing your latest self assessment return.
Why do I have to make payments on account?
If you fit the above criteria and are therefore required to make payments on account, your estimated tax liability for the year ahead is split in half to make the payment easier to manage.
How are payments on account calculated?
Payments on account are based on your earnings from the previous year. If your income dramatically falls, you can make a claim to reduce your upcoming payments on account.
E.g. if your tax bill for 2022/23 was £3,000 and during 2023 you paid £900 of this, by midnight on the 31st January 2024 you will need to have paid the balance of £1200 plus £1,500 which is half your predicted amount of your 2023/2024 tax bill.
You will then make your second payment on account of £1,500 on 31st July 2024.
If your tax bill for the 2023 to 2024 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2025.
Can I reduce my payments on account ?
It is possible to change your payments on account but you should be careful of reducing them too much, or deliberately underestimating your income, as you can incur an interest charge on any tax shortfall. If your income increases substantially this will result in a ‘balancing payment’ on the 31st January of any shortfall from your two payments on account. It’s important to keep this in mind and be aware of the impact of any significant changes to your earnings to your payments on account.
One way to make sure you don’t pay any more than needed in July is to get your tax return done early! Once the tax year has ended on the 6th April, you can complete your return using your actual income. As long as you do this before the 31st July, your second payment on account will be recalculated based on these actual figures.
What if I can’t afford it?
You can contact HMRC in good time before the 31st July to arrange a payment plan if you can’t make the payment. If you miss the deadline without informing HMRC, you’ll accrue interest and penalties.
HMRC are extremely strict when it comes to on account payments. If you haven’t paid off the tax by the following January, you should expect to pay 5% of the total charge along with the accrued interest.
Ultimately, be sure to stay aware of your responsibilities throughout the year to avoid any hidden costs and penalties. If you need help with your self assessment then Get in touch.
