HMRC Payments on Account: Are You Overpaying in the 2023/24 Tax Year?
Introduction
In the landscape of financial responsibilities, comprehending the specifics of HMRC’s “payments on account” is paramount. Although it may initially seem complex, understanding this concept can bring substantial advantages. This exhaustive guide seeks to unpack what payments on account are, who they affect, and how to discern whether you might be overpaying.
What are Payments on Account?
Payments on account are essentially advance payments towards your tax bill, mandated by HM Revenue and Customs (HMRC). These payments are typically required from individuals whose previous year’s balancing payment exceeded £1,000 and was over 20% of the total tax liability, after considering any tax deductions at source like PAYE1. They are most commonly made by self-employed individuals, property landlords, or those receiving significant savings income.
For example, for the tax year ending 5 April 2024 (2023/24), the second payment on account is due by 31 July 2024. Each payment represents an estimate of your tax liability for the year, based on the previous tax year’s amount. The first half is due on 31 January during the tax year, while the remaining half is payable six months later, on 31 July, following the end of the tax year.
When Can Payments on Account Change?
The system works well if your income remains consistent. But what happens if your income tax liability for the year 2023/24 is anticipated to be lower than that for the year to 5 April 2023 (2022/23)? This could occur in scenarios such as:
- Your business profits have fallen in the accounting year ending in the 2023/24 tax year
- You have retired or ceased working
- You have sold a previously rented property
- You received a one-off taxable lump sum in 2022/23
- You made additional pension contributions or invested in Venture Capital Trusts (VCTs) or Enterprise Investment Scheme (EIS) companies in 2023/242
If you find yourself in one of these situations, you have the option to reduce payments on account.
Reducing Payments on Account
HMRC permits claims to lower payments on account if you believe your tax liability for 2023/24 will be less than that for 2022/23. The most effective way to do this is by filing your tax return for 2023/24 before 31 July 2024. Consequently, HMRC will automatically adjust the payments on account to the correct amounts.
However, if you are unable to file your tax return in time, you can claim to reduce the payments based on your best estimate of the due tax. Be cautious, as exceeding the reduced payments on account with your final tax bill will incur interest. HMRC might also levy a penalty if they believe you have excessively underestimated your tax liability.
Proceeding with Caution
If you have recently received your statement from HMRC demanding the second payment on account due at the end of July, and you suspect your tax bill for 2023/24 will be lower, it is prudent to compile your tax return information promptly. This enables a review of your tax position in advance of making the second payment on account to HMRC by 31 July 2024.
Remember, you must actively make a claim to HMRC to reduce the payments on account. Simply paying what you believe is due, without informing HMRC, will result in them pursuing you for the balance.
The Process of Reducing Payments on Account
To reduce payments on account, you may use HMRC’s Form SA303, which can be accessed via the HMRC’s official website. This form can be used either to reduce payments on account or to alter earlier claims.
Conclusion
Understanding and correctly managing your HMRC payments on account can result in significant financial savings. If you suspect these payments might affect you and are considering strategies to minimise future tax bills, professional advice is recommended. Keeping abreast of changes and making timely decisions can not only help reduce your tax bills but also prevent potential penalties.
With an accurate understanding of your income, and by following HMRC guidelines, you can ensure that your payments on account are not higher than necessary.
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Q: What are payments on account?
A: Payments on account are advance payments paid to HM Revenue and Customs (HMRC) towards your tax bill for the next tax year.
Q: When are payments on account due?
A: Payments on account are due twice a year, with the first payment due on 31 January and the second payment on 31 July.
Q: How are payments on account calculated?
A: Payments on account are calculated based on your previous year’s tax bill. The amount of each payment is usually 50% of your previous year’s tax bill.
Q: What is a balancing payment?
A: A balancing payment is the amount you need to pay to HMRC to settle your tax bill once you have completed your tax return for the year. It takes into account your first payment on account and your second payment.
Q: Can I reduce my payments on account?
A: Yes, if you believe that your tax bill for the next tax year will be lower than the previous year, you can make a claim to reduce your payments on account.
Q: How do I reduce my payments on account?
A: You can reduce your payments on account by logging into your HMRC online account and making a claim to reduce your payments. Alternatively, you can fill out form SA303 and send it to HMRC.
Q: What happens if I overpay my payments on account?
A: If you overpay your payments on account, HMRC will refund the overpaid amount to you.
Q: What happens if I underpay my payments on account?
A: If you underpay your payments on account, HMRC will charge interest on the amount underpaid until it is paid off.
Q: Do payments on account include Class 4 National Insurance contributions?
A: Yes, payments on account include both income tax and Class 4 National Insurance contributions.
Q: Do I need to make payments on account if I have tax deducted at source?
A: If you have tax deducted at source, such as through PAYE, you may still be required to make payments on account if you have additional income not subject to tax deduction.
If you need personalised advice on managing HMRC payments on account, don’t hesitate. Reach out to our experienced team at Jack Ross Chartered Accountants if you want to reduce your tax payment. We will work with you to reduce the tax due. Call us on 0161 832 4451 or complete the webform below. We are ready to help you with your tax account.