< Go Back Self-employed - How to calculate your payments on account Posted: Nov 21, 2019
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 and, where payments need to be made on account, 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 of 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 bill 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.
Example
Richard
is a sole trader. In 2018/19 his profits from self-employment were £30,000. He
has no other income.
His
income tax liability for 2018/19 is £3,630 (20% (£30,000 - £11,850)) and his
Class 4 National Insurance liability is £1,941.84 (9% (£30,000 - £8,424).
His
combined tax and Class 4 National Insurance liability is thus £5771.84.
As
this is more than £1,000, he must make payments on account of the 2019/20 tax
year of £2,785.92 on 1 January 2020 and 31 July 2020. Each payment is 50% of
the previous year's liability of £5771.84. If the liability for 2019/20 is more
than £5,771.84, the balance must be paid by 31 January 2021, together with the
Class 2 National Insurance for 2019/20.
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.
Example
Tim
has a tax and Class 4 National Insurance liability of £900 in 2017/18. As a
result, he is not required to make payments on account for 2018/19. However,
2018/19 is a good year and his tax and National Insurance liability is £4,000.
As payments on account were not made, the amount is due in full by 31 January
2020. Also, because it is more than £1,000, he must make payments on account
for 2019/20.
As a
result, he has to pay £6,000 on 31 January 2019 - the full liability for
2018/19 (£4,000) and the first payment on account of £2,000 (50% of £4,000) for
2019/20. The second payment on account for 2019/20 of £2,000 is due by 31 July
2020.
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.
Partner note: TMA 1970, s.
59A