As part of your tax bill you may see an amount called a payment on account. This is an amount that you have to pay on account against the tax due in the current year.
Often people think that they are having to pay tax in advance but actually tax due for the self employed is paid in arrears; by 31 January following the end of the tax year. So 10 months later.
HMRC use the payments on account system to make sure that they have collected at least part of the tax due as you go.
Yes it can be rather confusing but let’s take a look at a simplified example which will hopefully explain how this all works ….
Jake makes £19,500 profit from his small business in the tax year 2019 / 2020.
He has no other income.
He is preparing his accounts and submitting his tax return for the tax year 2019 / 2020; this covers the period 06/04/19 to 05/04/20.
His tax bill for the year (excluding his Class 2 National Insurance which are not included in the Payment on Account calculation) will be …
Calculating Tax Due
Profit less personal allowance = taxable income
£19,500 – 12,500 = £7,000 taxed at 20% = £1,400 income tax due
Profit – £8,632 = amount subject to Class 4 National Insurance at 9%
£19,500 – £8,632 = £10,868 x 9% = £978.12 Class 4 National Insurance due
Total taxes due and payable by 31 January 2021 = £2,378.12
By the time that this amount is due for payment the tax year of 2020 / 2021 is almost over.
What about 2020 / 2021
2020 / 2021 started on 06/04/20 and finishes on 05/04/21.
So by 31/01/21 there is just over 2 months of that tax year left and 10 months of that year have passed.
Payments on account are due when the tax payable for the previous year was over £1,000.
However if more than 80 per cent of this tax has already been collected at source, then no payment on account will be due e.g. if you are a CIS subcontractor.
Payment on Account for tax year 2020 / 2021 would be due on 31 January 2021 and 31 July 2021 i.e. two payments on account are made each being half of the tax due in the previous year.
You can apply to reduce or eliminate your payment on account by using the form SA303:
However if when you submit your details the payments on account that would have been due are calculated as being greater than the amount paid interest will be charged on the difference.
Final Tax Payments at 31 January 2021
As Jake’s tax due is more than £1,000, HMRC will expect him to make a payment of account of half of the total of the taxes due of £2,378.12 i.e. including the Class 4 National Insurance bill.
So a payment on account of £1,189.06 is due on 31 January 2021 and the same amount is also due on 31 July 2021.
This makes the total tax due on 31 January 2021 £3,567.18.
Not in advance
On 31 January 2021 approximately 80% of the tax year 2020 / 2021 is over.
50% of the estimated tax bill for the tax year 2020 / 2021 is due on 31 January 2021.
Another 50% of the estimated tax bill is due on 31 July 2021 – well after the tax year 2020 / 2021 is over.