Do I Need To Make Payments On Account?

The 2015/16 self-assessment tax return must have been filed online by 31 January 2017 to avoid a late filing penalty. This is also the deadline for paying any outstanding tax and self-employed National Insurance contributions for 2015/16, and also the date by which the first payment on account for the 2016/17 tax year must be made. A payment on account is simply a payment towards the final liability for the tax year to which the payments relate.

Not everyone who files a self-assessment tax return will need to make a payment on account. Payments on account are not required if your self-assessment bill for the previous tax year was less than £1,000, or if more that 80% of your income was deducted at source (e.g. under PAYE). If the 80% test is met, payments on account are not required, even if your self-assessment bill is more than £1,000.

Each payment on account is 50% of the previous year’s liability. So, for 2016/17 each payment on account is 50% of the 2015/16 liability.

A person who is required to make payments on account must make one payment by 31 January in the tax year and another by 31 July following the end of the tax year. If the total amount paid on account for the year is less than the final liability for the year, any outstanding balance must be paid not later than 31 January after the end of the tax year. If the amount paid on account is more than the final tax liability, the excess if refunded or, where applicable, set against the payments on account due for the following year.

This means that for 2016/17, an individual who is liable to make payments on account must make the first payment no later than 31 January 2017 and the second payment no later than 31 July 2017. Each payment is 50% of the self-assessment bill for 2015/16. Any balance owing for 2016/17 not covered by the payments on account must be paid no later than 31 January 2018.

When working out how much you need to pay and whether a ‘sweep up’ payment is due, remember to deduct payments on account made for the year from the account shown on the tax calculation – the tax return calculation does not reflect any payments made. You can check what has been paid during the year by logging into your personal tax account and selecting `View statements’. This will show the payments on account that have already been made and the amount that needs to be paid.

If you have a self-assessment liability of £1,000 or more for 2015/16, you will need to make a payment on account for 2016/17 unless at least 80% of your tax has been deducted at source, for example under PAYE. It may be that you know that your income will be less in the following year or that the source in respect of which the liability arose has ceased.

Where this is the case, it is not necessary to make the payments during the year and wait to claim a refund once the tax return for the year has been submitted. Instead, you can ask HMRC to reduce your payments on account to reflect the amount that you expect to be due. This can either be done online via your self-assessment return (select `Reduce payments on account’), or by completing form SA303 and sending it to your tax office.

Beware of reducing your payments on account below the correct amount of the payment, as interest will be charged where payments on account should have been made and were paid late.

In 2015/16 George, a self-employed decorator, makes a profit of £38,000. He has no other income. His tax liability for the year is £5,480 (20% (£38,000 – £10,600)). He must also pay Class 4 National Insurance contributions of £2,694.60 (9% (£38,000 – £8,060)) and Class 2 contributions £145.60 (payable at a rate of £2.80 per week).

His total tax and Class 4 NIC liability is £8,174.60. This is the figure which determines whether payments on account are due. Payments on account are not made in respect of the Class 2 liability.

As this figure exceeds £1,000, he must make payments on account of £4,087.30 by midnight on 31 January 2017 and 31 July 2017. Any remaining tax/Class 4 National Insurance contributions for 2016/17, together with his Class 2 National Insurance contributions, must be paid by midnight on 31 January 2018.

Contact Nouman Shahzad ACA, FCCA

Email: nouman@knnllp.co.uk

Partner at Kaiser Nouman Nathan LLP