With 31 January just around the corner we will be writing about self-assessment every week for the coming month.
One of the most common queries we encounter when presenting clients with their tax liabilities is the payment on account.
Firstly, if 80% of your income is taxed through PAYE you don’t have to pay a payment on account.
However, if your self-assessment tax bill is over £1,000 you’ll be asked to make payment on account.
This means that on top of the tax liability for the current year (17/18) payable by 31 January (2019) HMRC require half of your total expected tax bill for the following year (18/19).
The other half is payable by 31 July (2019).
HMRC calculate the size of your payment on account based on the tax liability of the current year. Therefore, HMRC assumes you will earn the same amount in the following year.
However, if for some reason or another you can predict that your tax liability will reduce in the following year you may be entitled to reduce your payment on account.
For example, if you’re switching to full time employment in the following year and your tax is deducted on source you shouldn’t have to pay payments on account.
Ultimately, its important to file your tax return earlier to avoid a nasty shock come the end of January.
If you can’t pay the full amount of tax due by the end of January HMRC are entitled to charge interest and penalties on the outstanding amount.