With everything that’s been going on in the world recently, you’d be forgiven for having things other than self assessment payments on account on your mind! But, with the 31st July 2020 approaching, in this week’s blog, we take a look at what payments on account are, whether you need to pay them, and what affect the current Covid-19 pandemic has had on the payment deadline.
Firstly, what are payments on account?
Payments on Account (POAs) are advance payments towards your next self assessment tax bill. If your self assessment tax bill is over £1,000, then HMRC will expect you to make payments on account in respect of the next tax year (unless you have already paid more than 80% of the tax owed (e.g. salary taxed at source).
If your accountant prepared your self assessment return for you, they will have advised you if any POAs are due. Alternatively, if you fi led your return yourself, this will have been flagged to you when the tax was calculated. If you have an online account with HMRC, you can always login to this to check as well.
How are they calculated?
Your POAs will be determined based on your previous year’s self assessment tax bill, and each POA will be calculated as 50% of that tax bill. So, as an example, if your 18/19 tax bill was £2,000, you will be expected to make two POAs for the 19/20 tax year, each in the sum of £1,000. Then, when your actual 19/20 tax liability is calculated, you will need to either make a balancing payment for any additional tax due, or you will receive a refund if you have overpaid.
But what if I know that I won’t owe that much tax next year?
If you know that your next year’s tax bill is going to be considerably lower than your current year (for example, if you had a large one off source of income one year that will not be repeated the next), and therefore by paying the standard POAs you will greatly overpay the actual tax due, you can put in a claim to reduce your payments on account. However, we would always recommend that you exercise caution when doing this as if this results in you underpaying, HMRC will charge you interest on the underpayment amount.
When are they due?
Your first payment on account will be due with your current year’s tax liability by 31st January. In ‘normal’ times, the second payment on account will be due by 31st July.
So, using the above example, you would have paid £3,000 by 31st January 2020 (made up of your £2,00018/19 liability plus your first 19/20 POA). You would then usually pay £1,000 by 31st July 2020 in respect of your second POA. Any balancing payment for 19/20 would then be due by 31st January 2021, and so the cycle continues.
However, as a result of the Covid-19 pandemic, and as part of the government measures to try and help tax payers out with their cash flow, the government confirmed that the second payment on account usually due by 31st July 2020 can instead be deferred until 31st January 2021. This is entirely optional, so you can still make your payment on account by the end of the month if you wish, and if you do decide to defer, you do not need to make any application to do so, you simply don’t make the payment until January 2021.HMRC have confirmed that no interest will be charged on deferred payments (provided it’s paid by 31st January 2021).
By changing the due date of this payment on account to the same payment deadline as the balancing payment for the 19/20 tax year, in essence this means that rather than paying an estimated tax amount, you will instead (provided your 19/20 personal tax return is completed and submitted on time) be able to pay the actual amount of tax due.
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