Understanding payments on account to avoid Self Assessment penalties

Navigating the complexities of tax obligations is a crucial aspect of financial management, particularly for self-employed individuals and small business owners in the UK. A key component of this process is understanding and managing Self Assessment payments on account.

In this comprehensive guide, we’ll delve into the intricacies of payments on account, exploring what they entail, how they work, and the potential consequences of late payments. From the mechanics of reducing payments to the possibilities of obtaining refunds, we’ll empower you with the knowledge needed to navigate the tax landscape effectively. 

What do payments on account mean in income tax?

Payments on account in income tax refers to the system in the UK where individuals, particularly self-employed and small business owners, make advance payments towards their upcoming income tax bill. These payments, due twice a year, are based on an estimate by HMRC of the taxpayer's previous year's tax liability. 

The purpose of payments on account is to spread out tax payments throughout the year, preventing a large lump-sum payment at the end of the tax year.

How do payments on account work?

If a taxpayer's last Self Assessment tax bill was over £1,000 and less than 80% of their tax was deducted through PAYE, they are required to make payments on account. The two deadlines for payments on account are midnight on January 31 (which includes a balancing payment for the previous tax year and the first payments on account for the upcoming year) and midnight on July 31 (for the second payments on account for the upcoming tax year).

Taxpayers have the option to apply to HMRC to reduce their payments on account if they anticipate a lower tax bill for the upcoming year. However, reducing payments too much may result in interest and penalties for underpaying taxes. 

How do I pay the payments on account?

There are a number of ways that you can pay your payments on account. To pay payments on account in the UK, you have the following options:

• Online Banking:

Set up a payment using your online banking platform. You'll need HMRC's bank details and your Unique Taxpayer Reference (UTR) number.

• CHAPS (Clearing House Automated Payment System):

If you require same-day payment, use CHAPS. Ensure you have HMRC's bank details and your UTR.

• Online Payment with Debit or Corporate Credit Card:

Pay online using a personal debit card or a corporate credit card. Note that personal credit cards are not accepted.

• Bank Payment:

Visit your bank with a paying-in slip from HMRC to make the payment. Provide your UTR for reference.

• BACS (Bankers' Automated Clearing Services):

If paying by BACS, initiate the payment a few days before the deadline. Use HMRC's bank details and your UTR.

• Cheque by Post:

If sending a cheque by post, ensure it reaches HMRC at least three working days before the deadline. Include your UTR on the cheque.

• Direct Debit:

Set up a direct debit with HMRC to automate payments. Submit the necessary form to your bank. Note that it takes about five working days for the first setup.

• Budget Payment Plan:

If you prefer regular payments throughout the year, set up a Budget Payment Plan. Specify the amount and frequency. The funds in the plan will be used against your next tax bill.

Remember to allow sufficient time for processing, especially if you choose Bacs or postal cheque payments. Missing payment deadlines may result in interest charges and late payment penalties. 

Can I reduce payments on account?

The answer to whether you can reduce payments on account is yes, should you anticipate that your tax bill for the upcoming year will be lower than the previous year. The process involves applying to HMRC for a reduction in your payments on account. 

This can be particularly relevant in scenarios where you expect a decrease in income, such as winding down a business or reaching retirement age and no longer having to pay Class 4 National Insurance.

However, it's essential to exercise caution when reducing payments on account. If you reduce the payments too much and end up underpaying your tax, HMRC may charge you interest and penalties for the shortfall. 

So, it is advisable to consult with an accountant if you are uncertain about the appropriate amount to reduce your payments on account. This ensures that you strike the right balance between managing your cash flow and meeting your tax obligations without incurring additional charges.

Can I get a refund on payments on account?

Receiving a refund on payments on account is possible for UK taxpayers, particularly those under the Self Assessment system. This refund process is designed to address situations where individuals or businesses have overpaid their taxes through advance payments.

To initiate the refund process, individuals must go through the Self Assessment procedure. This involves submitting a comprehensive tax return for the relevant tax year, accurately detailing income, deductions, and any tax owed. The tax return serves as the foundation for assessing whether payments on account exceed the actual tax liability.

Following the submission of the tax return, HMRC undertakes a thorough review to verify the accuracy of the provided information. If the review indicates that the taxpayer has indeed overpaid through payments on account, HMRC calculates the refund amount. 

Upon completing the review and calculation, HMRC notifies the taxpayer of the overpayment and outlines the details of the refund. This keeps the taxpayer informed about the status of their payments on account and the forthcoming refund.

Once the refund amount is determined, taxpayers can choose how they wish to receive the refund. Common options include receiving a cheque, a bank transfer, or offsetting the overpayment against the next payments on account tax bill.

What happens if I’m late in paying my payments on account?

Late payments on your payments on account in the UK can have significant consequences. 

Firstly, it’s important to note that HMRC applies interest to the overdue amount from the due date until payment. Additionally, late payment penalties may be imposed, separate from interest charges, which may increase the financial impact. 

Proactive communication with HMRC is crucial, as contacting them early allows for discussions and potential arrangements like a 'Time-to-Pay' agreement.

In a general sense, late payments can disrupt your budget and financial planning, potentially impacting overall financial stability. Persistent delays may escalate the situation, leading to more severe enforcement actions by HMRC, including legal proceedings to recover taxes, incurring additional costs and legal consequences.

To avoid these repercussions, it’s important to address payments on account in good time. If you’re struggling, it may be helpful to seek professional advice or consult with HMRC about specific circumstances and mitigate potential penalties.

Take the stress out of Self Assessment payments on account

Staying on top of tax obligations like Self Assessment payments on account is not always easy. With this in mind, QuickBooks’ intuitive accounting software is designed to simplify this process for self-employed individuals and small business owners.

With our software, the complexities of Payments on Account are streamlined through features such as auto-calculation, efficient categorisation, and real-time tracking. This software takes the guesswork out of tax preparation, providing estimations for Self Assessment and helping users maximise their tax savings.

And, should you need support, our support hub, run by our award-winning experts is here to help you. From automating administrative tasks to offering valuable insights, we have the right tools for you.

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