We are often asked by clients who have to submit tax returns “why do I have to make a payment on account?”
Well, HMRC ask that two payments on account are made towards the liabilities of the following tax year UNLESS:
· The outstanding tax liability showing on your tax return for any year is less than £1,000, or;
· More than 80% of the income tax due for the year was paid at source (e.g. via PAYE)
Each payment is half of your previous year’s tax bill. The first payment on account is due to be paid to HMRC by 31stJanuary following the end of the tax year, with the second being due by the following 31st July.
Clients also tend to think that they are paying in advance, but that is not really the case. Payments made in January and July 2017 relate to the tax bill for the year ended 5th April 2017 – so technically the tax is being paid in arrears.
If for whatever reason you believe that your income will be lower in the following tax year, you can request that your payments on account be reduced, however HMRC can charge interest on any underpayment if this proves not be the case.