It is that time of year where self-assessment returns filed in January rear their ugly scorpion tails again
Payments on accounts are due on the 31st July, and I have already had many of my clients contact me to see if they can reduce their payments! It is the HMRC’s sting in the tail and if you look up this phrase the definition is “an unexpected and typically unpleasant or problematic end to something”. Well, that just about sums up payments on account. Let’s explore this further.
The payment on account is a tax payment made twice a year by those who submit tax returns. It is calculated by looking at the previous year’s tax bill and is due in two instalments.
The payment on account pays the client’s tax bill in advance. The first instalment is due on 31st January, when the tax for the year is due. The second is due on 31st July. For those clients entering the payment on account regime, they will have to pay the tax due in that year and then 50% again as a payment on account for the following year; the second 50% being due on the 31st July. It is intended to help individuals spread payments throughout during the year – and, of course, help to provide the Revenue with a financial boost in the middle of the year.
Each of the two instalments of the payment on account will normally be 50% of the previous tax bill. So, if a tax statement paid £10,000 in the tax year for which you are filing your return, the client will need to make the first payment on account of £5,000 on 31st January, and another payment of £5,000 on 31st July. This will include Class 4 National Insurance Contributions where applicable, but not student loan repayments or Capital Gains Tax.
There are some circumstances in which a payment on account will not be due. If the tax bill for the previous year was less than £1,000 after PAYE or other deductions at source, no payment on account is necessary. Similarly, no payment on account will be due if, in the previous tax year, 80 per cent or more of your tax was deducted at source.
You can also apply to have the payment on account reduced if you have a good reason to believe that your clients income in the following year will be less; this is often the case with dividends as a year with a high dividend declaration may be followed by a year with lower dividends and hence a lower overall tax bill. However, be warned, if the payment on account is reduced and it turns out that you should have paid more the Revenue could charge you interest on the underpayment.
Please check that your self-assessment clients do need to make a payment on account in July; the best way to do this is to draft their self-assessment returns for the year ending 5th April 2019; I’ve already saved my clients over £10, 000 in payments on accounts because their situations have changed.
So, the scorpion may have a sting in its tail, but you can also crush it with your foot! That is what makes us ICB Bookkeepers.