If your income comes solely from employment, your tax payments are relatively straightforward. However, if you have additional income sources like dividends, self-employment, or property rental, your tax situation becomes more complex.
In the self-assessment system, you’re required to make ‘payments on account’ towards your income tax liabilities. But what are these payments exactly?
Understanding Self-Assessment Income Tax
The self-assessment method for personal tax consolidates all your taxable income from various sources for each tax year, ending on 5 April.
This includes:
- Income from employment
- Income from self-employment and partnerships
- Dividends and other investment income
- Property rental income, capital gains, and other taxable income
- National Insurance on self-employment and partnership income (excludes employment income)
The total tax due is calculated considering your personal allowances and any available deductions. This includes student loan repayments and National Insurance (apart from NI on employment income).
How are Payments on Account Determined?
HM Revenue & Customs (HMRC) calculates the payments on account based on the gross tax due (excluding capital gains tax and student loan repayments) plus Class 4 National Insurance contributions.
If the tax amount is below £1,000, or if more than 80% of it was paid through PAYE, payments on account are not required. You only need to settle any unpaid amounts by 31 January following the tax year.
For tax charges over £1,000 where less than 80% is paid through PAYE, payments on account are necessary.
Payment Schedule for Payments on Account
Each tax year requires two payments on account, each 50% of the previous year’s tax charge. The first payment is due by 31 January of the tax year, and the second by 30 June after the tax year ends.
If you anticipate that these payments will be higher than your actual tax due, you can request to reduce them. This might be due to expected lower income or more income being taxed through PAYE. However, underestimating your payments could result in interest charges on the shortfall.
Note: The January payment is offset by any tax already deducted at source, such as PAYE earnings or taxed interest.
Practical Application
We handle the calculation of payments on account along with your self-assessment return. If a reduction is possible, we’ll arrange it for you.
Once we’ve informed you of the amounts due in January and July, it’s up to you to ensure payment to HMRC, either online or by mailing a cheque with the HMRC tax notification form.
Consulting on Your Payments on Account
Payments on account often surprise new recipients of self-employment or dividend income not taxed at source.
We’ll assist you in estimating these payments and preparing for the significant payments due twice a year.
