Understanding How Payment on Account Works
The UK taxation system can be complex, and one of the more confusing aspects is the ‘payment on account’ system. To help you navigate this, we’re going to explain how payment on account works, the deadlines involved, and tips for managing your payments effectively.
What is Payment on Account?
Payment on Account is a system used by HM Revenue and Customs (HMRC) to collect Income Tax and Class 4 National Insurance Contributions in two equal instalments. These payments are made in advance, based on your previous year’s tax bill. According to the official HMRC website, this applies to anyone who owes more than £1,000 in tax after subtracting tax they’ve already paid or tax that’s been deducted at source.
How Does Payment on Account Work?
The payment on account system works by estimating your next year’s tax bill based on the previous year’s. If your income varies significantly from year to year, this can sometimes result in over or under payments.
Calculation of Payments on Account
Each payment is half of your previous tax year’s bill including any Class 4 National Insurance Contributions, but not Capital Gains Tax or Student Loan repayments. If your tax bill for the 2024/2025 tax year was £3,000, for instance, each payment on account for 2025/2026 would be £1,500.
Payment Deadlines
The two payments on account are due on 31 January and 31 July. Using the example above, you would make a payment of £1,500 on 31 January 2026 and another payment of £1,500 on 31 July 2026.
Balance Payments
If your tax bill for 2025/2026 turns out to be more than the total of the two payments on account, you’ll need to make a ‘balancing payment’ by 31 January 2027. If it’s less, you may be able to claim a refund or reduce your next payments on account.
Tips for Managing Payments on Account
- Keep Accurate Records: Ensure you keep accurate financial records. This will help you estimate your income correctly and avoid over or under payments.
- Set Money Aside: Make it a habit to set money aside for tax payments. This will help you avoid any last-minute stress.
- Request Reduction: If you know your income will be less than the previous year, you can request HMRC to reduce your payments on account.
- Speak to a Professional: If you’re unsure about anything, it’s always best to speak with a professional. A tax advisor or accountant can provide advice tailored to your individual circumstances.
Conclusion
Understanding how payment on account works is vital if you want to manage your tax obligations effectively. Although it might seem confusing at first, once you understand the system, it can help you plan your cash flow and avoid any unwelcome surprises. Always remember to check the official HMRC website for the most accurate and up-to-date information.
