The deadline for filing the self-assessment tax return for 2018/19 is 31 January 2020. This is also the date by which any outstanding tax for 2018/19 must be paid, when payments need to be made, and the date by which the first payment on account of the 2019/20 liability must be made.
What is a payment on account?
As the name suggest, a payment on account is an advance payment towards a taxpayer’s tax and Class 4 National Insurance bill. Where payments on account are due, the tax is payable in two instalments on 1 January in the tax year and on 31 July after the tax year rather than in full in a single instalment on 31 January after the tax year.
As the payments on account are based on the previous year’s liability, it is not an exact science – there may be more tax to pay or the taxpayer may have paid too much. Any balancing payment must be made by 31 January after the end of the tax year. If the taxpayer has paid too much, the excess will normally be set against the next year’s payments on account or refunded if none are due.
When must payments on account be made?
Payments on account must be made where tax and Class 4 National Insurance for the previous tax year was £1,000 or more, unless at least 80% of the tax owed has been deducted at source, for example under PAYE.
Payments on account are not required when tax and Class 4 National Insurance for the previous year was less than £1,000.
Calculating the payments on account
Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability.
Class 2 National Insurance contributions are not taken into account in calculating the payments on account and must be paid in full by 31 January after the end of the tax year.
Beware fluctuating years
Where the tax and Class 4 liability is under £1,000 one year but not the next, the payments can fluctuate widely – this may hit the taxpayer hard.
Reduce payments on account
If the taxpayer knows that income in the current year will be less than the previous year, they can ask HMRC to reduce the payments on account. However, interest is charged on the shortfall if the payments are reduced below the level they should be.
If you would like help with your tax return, please contact our Private Client Tax team on either Rugby 01788 539000 or Leicester 0116 261 0061.