What Are Payments on Account?
The payments on account system is designed for people with untaxed income sources like the self-employed, partners in partnerships, or those with investment, rental, or dividend income. Unlike PAYE (Pay As You Earn) where tax is taken directly from your salary or pension each month, these payments cover income that hasn’t had tax deducted at source.
The key deadline to remember for paying your tax is 31st January after the tax year ends. For example, for the 2023/24 tax year (from 6th April 2023 to 5th April 2024), the final payment date is 31st January 2025. Some taxpayers, however, need to make payments on account before this date.
Key Dates and How Payments on Account Work
For the 2023/24 tax year, your first payment on account is due by 31st January 2024. The second payment follows on 31st July 2024. Here are the key dates for the 2023/24 tax year:
- First Payment on Account: 31st January 2024
- Second Payment on Account: 31st July 2024
- Final Payment: 31st January 2025
These payments are usually half of the previous year’s income tax and National Insurance Contributions (NIC), minus any tax already paid under PAYE.
How to Calculate Payments on Account
Payments on account are based on half of your previous year’s tax bill. For example, if Bob the Builder had a tax bill of £7,000 for the 2022/23 tax year, he would need to make two payments of £3,500 each for the 2023/24 tax year.
These payments are designed to cover your estimated tax for the current year, based on last year’s figures. If Bob’s income stays about the same, his total tax for 2023/24 should be similar. Any differences are then ironed out with a final “balancing payment” due on 31st January after the tax year ends.
When You Don’t Need to Make Payments on Account
You don’t have to make payments on account if your previous year’s tax bill was less than £1,000 or if more than 80% of your tax was collected at source via PAYE.
For example, if you have a high salary taxed through PAYE and a small amount of rental income, you might not need to make payments on account if the rental tax is less than 20% of your total tax bill.
Common Surprises and Potential Shocks
A common surprise occurs when your tax bill exceeds £1,000 for the first time.
If Bob’s tax bill for 2022/23 was £950, he wouldn’t need to make payments on account for 2023/24.
However, if his tax bill then jumps to £1,500 for 2023/24, he’ll need to pay the £1,500 by January 2025, and also start making payments on account for 2024/25. This means a balancing payment in January 2025 of £1,500 plus a first payment on account of £750 for 2024/25, with another £750 due in July 2025.
Summary
Understanding payments on account can be tricky, especially if your income varies. If your income stays stable, your payments should remain consistent.
However, significant changes in income, like a surge in rental property repairs that reduces profits, can lead to larger tax bills or even refunds the next year.
If you have any questions or need further clarification about the payments on account system, feel free to get in touch or watch our video here.
