Demystifying Payments on Account: What Small Business Owners Need to Know

You might have just heard about payments on account or even received a statement from HMRC in the past few weeks reminding you that yours is due by 31st July! But do you actually understand what they are? I'm here to shed light on what a payment on account is and how it affects your tax compliance. With the 31st July deadline fast approaching, it's important to understand what payments on account entail and who they apply to.

What are payments on account anyway?

When you're self-employed, HMRC may require you to make payments on [your tax] account towards your future tax bill. I say future tax bill but actually it is an estimated tax liability on the money you are earning NOW. It's just that Income Tax Self Assessments [aka tax return] are submitted at the end of the tax year. These payments act as a holding payment towards your next tax bill and help you spread the cost over the year.

There are 2 payments on account per tax year [if you need to make them that is]. One is due by 31 January and one is due by 31 July. Each payment value is half the previous years tax bill.

Who needs to make payments on account?

If your tax bill exceeds £1,000 and less than 80% of your tax liability is covered through tax deductions at source (e.g., through PAYE/Employment), you're likely to be required to make payments on account. The first time you're required to make a payment on account can come as a shock as you effectively need to pay 150% of your tax bill in one go. So, it's essential to understand your individual tax situation and speak with a professional bookkeeper or accountant to ensure you are compliant. This is why we also recommend saving your tax as you earn!

At May.i Finance Ltd we always recommend that our clients file their tax returns as early as possible. Filing your tax return early offers several advantages:

It provides a clear picture of your tax liability, allowing you to plan and budget effectively.

Early filing also minimizes the risk of penalties for late submission and gives you peace of mind, knowing that your tax obligations are taken care of.

This month we'll be diving deeper into the world of tax returns, bookkeeping services, and strategies for optimising your financial processes on our social media channels.

If you'd like to speak to us about how we can support you with any aspect of bookkeeping and self assessment, you can contact us here.