If you are a business owner and pay income tax and Class 4 National Insurance contributions via a self-assessment tax return, you may be liable to make ‘payments on account’ for the next tax year.

Payments on account are advanced tax payments for the following year, spread over two instalments. The payments on account system were designed to prevent people becoming indebted to HMRC and applies to all UK taxpayers who don’t pay tax at source on more than 80 percent of their income. Paying tax at the source occurs where tax is paid over to HMRC before income is received, as is the case for employees under the PAYE system.

When are payments on account made?

The first instalment of your payment on account has to be paid by the 31st January, the same deadline for the payment of any outstanding tax for the previous tax year. The second instalment must be paid by midnight on the 31st July.

Do you have to make payments on account?

If your tax liability for the previous year came to £1,000 or more, you have to pay the total liability in advance, split between the two payments. There’s no way to opt out of making payments on account simply because you are a small business or are short of cash.

However, in some circumstances, you can apply to reduce your payments on account. This could be the case if you know your income tax and Class 4 NICs bill will be lower for next year. For example, if you have lost a major customer and your income will fall over the next year, you can apply to reduce your advance tax payments.

You can apply to reduce your payments on the account via the Government Gateway, where you file your self-assessment tax return. You should take care when applying to reduce your payments on account as if you reduce it too far, HMRC will treat it as unpaid tax and charge you interest. For this reason, you should leave some margin for error.

How are payments on account calculated?

If you paid £10,000 tax in the 2015/16 year, you would have to make the first payment on account of £5,000 by 31 January 2017, and the second payment of £5,000 by 31 July 2017 to cover your future tax liabilities.

However, the likelihood is that your tax liability for 2016/17 will not be the same as the previous year. If, when it comes to next year’s self-assessment return, it transpires that you owe £12,000 for the tax year, you will then have to make a balancing payment of £2,000. This is because you only paid £10,000 on the account during the previous year.

But that works both ways. It could be that after filing your most recent self-assessment, you only owe £8,000. In that case, as you have already paid £10,000 on account for the year, you will be due to a refund of £2,000.

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