Have you ever been confused about the HMRC Payment on Account? If so, this article is for you. It provides a clear and concise explanation of what the HMRC Payment on Account is, helping you understand how it works and why it’s important. Whether you’re a business owner or an individual taxpayer, this article will help demystify the HMRC Payment on Account and give you the knowledge you need to stay on top of your tax obligations. So, let’s get started and unravel the complexities of the HMRC Payment on Account together!
Understanding the HMRC Payment on Account
What is HMRC?
HMRC, which stands for Her Majesty’s Revenue and Customs, is the government agency responsible for collecting and managing taxes in the United Kingdom. They ensure that individuals and businesses pay the correct amount of tax, administer various schemes, and provide guidance and support on tax-related matters.
What is a Payment on Account?
A Payment on Account is a system introduced by the UK tax legislation allowing HMRC to collect income tax and Class 4 National Insurance contributions in advance. It requires individuals who meet certain criteria to make two instalment payments each year towards their tax bill. These payments are based on their previous year’s tax liability and are made in addition to any outstanding tax owed for that year.
Who is Required to Make Payments on Account?
You may be required to make Payments on Account if you meet the following criteria:
- You are self-employed and your tax liability exceeds excluding capital gains exceed £1,000.
- You receive income from sources such as rents, dividends, or investments, and the tax due on this income cannot be collected through the Pay As You Earn (PAYE) system.
- You have previously made Payments on Account and your tax liability for the previous year was over £1,000.
If you are unsure whether you need to make Payments on Account, it is best to consult with HMRC or a tax professional to determine your individual circumstances.
How are Payments on Account Calculated?
Payments on Account are calculated based on your tax liability from the previous year. HMRC uses this information to estimate your tax liability for the current year and divides it into two equal instalments. The first instalment is due by January 31st, and the second instalment is due by July 31st.
For example, if your tax liability for the previous tax year was £4,000, HMRC would expect you to make two payments of £2,000 each as Payments on Account for the current tax year.
When are Payments on Account Due?
The first instalment of Payments on Account is due by January 31st, which is the same deadline for filing your Self Assessment tax return. The second instalment is due by July 31st of the same year.
It is important to note that Payments on Account are provisional and based on the self assessment tax you paid in the previous year. If your income for the current year is expected to be significantly lower, you may be able to adjust your Payments on Account to avoid overpaying.
What Happens if Payments on Account are Over or Underpaid?
If your Payments on Account are calculated to be too high and you end up overpaying, HMRC will refund the excess amount once your tax liability for the year is finalized. This refund will be credited towards any outstanding tax owed for the following year or, if applicable, sent directly to you.
On the other hand, if your Payments on Account are too low, and you underpay your tax liability for the year, you will be required to pay the remaining balance by January 31st of the following year.
Can Payments on Account be Deferred or Reduced?
Under certain circumstances, you may be able to defer or reduce your Payments on Account. If your income for the current year is expected to be significantly lower than the previous year, you can estimate your tax liability and request HMRC to reduce your Payments on Account accordingly.
However before asking HMRC to reduce your payment on account be sure that your actual tax liability for the current year will not be significantly higher than your tax liability in the previous year.
How to Make Payments on Account?
To make Payments on Account, you can use various methods offered by HMRC, such as:
- Online: By using the HMRC online payment portal, you can make your Payments on Account quickly and securely. You will need your Unique Taxpayer Reference (UTR) and a payment reference number, which can be found on your Self Assessment statement or payment reminder.
- Telephone: HMRC also offers a telephone payment service, where you can call their automated payment line and make your Payments on Account using a debit or credit card. Again, you will need your UTR and payment reference number.
- Bank Transfer: If you prefer to make your Payments on Account through bank transfer, you can use the details provided by HMRC in your payment reminder or Self Assessment statement.
Always ensure that you make your Payments on Account on time to avoid penalties or interest charges.
What Happens if I Don’t Make Payments on Account?
Failing to make Payments on Account can have serious consequences. HMRC may charge you interest on the outstanding amount, and you may also be subject to penalties for late payment. These penalties are progressive and can easily add up to a significant amount.
If you consistently fail to make Payments on Account without a reasonable excuse, HMRC may take further action, such as taking legal action to recover the outstanding amount or using debt collection agencies.
To avoid these issues, it is essential to stay organized, keep track of your tax obligations, and make your Payments on Account on time.
How to Avoid Overpaying on Account?
Overpaying on Account can be avoided by accurately estimating your tax liability for the current year. If you anticipate that your income will be lower than the previous year, you can ask HMRC to reduce your Payments on Account. By doing so, you will pay a more appropriate amount, avoiding the hassle of reclaiming the excess amount later on.
Additionally, keeping detailed records of your income and expenses, consulting with a tax professional, and regularly reviewing your tax situation can help you better estimate your tax liability and make the necessary adjustments to your Payments on Account.
Understanding the HMRC Payment on Account can initially seem complex, but by familiarizing yourself with the system, adhering to deadlines, and seeking guidance when necessary, you can ensure that your tax obligations are met, and potential issues are avoided.