how to calculate payments on account

HMRC payments on account can be confusing and the cause of unexpected tax bills.  Understanding how HMRC payments on account are calculated will help avoid the shock of a larger than anticipated tax bill and how you budget for your personal tax bill.

What are HMRC Payments on Account?

Put simply payments on account are an amount that HMRC asks you to pay in advance of your next tax bill (including Class 4 national insurance but NOT Class 2 national insurance if you are self employed). You must pay 50% on 31 January and another 50% on 31 July.

You must make these two payments on account to HMRC every year unless:

  • your last Self Assessment tax bill was less than £1,000;
  • you’ve already paid more than 80% of all the tax you owe, for example through your tax code or because your bank has already deducted interest on your savings.

How are HMRC Payments on Account Calculated?

The easiest way to explain how payments on account are calculated is to roll back to the point where you submitted your very first self assessment tax return, so lets pretend your first tax return was submitted on 31 January 2016 covering the tax year 6 April 2014 to 5 April 2015.

It’s 31 January 2016

Your completed self assessment tax return shows that your tax bill is £5,000 for the year ended 5 April 2015.  So on the 31 January 2016 you need to pay £5,000 plus 50% payment on account towards your next tax bill of £2,500.

Total Tax Bill due by midnight 31 January 2016 £7,500.

It’s 31 July 2016

Leading up to this date you will be receiving reminders from HMRC that you need to make another payment on account towards your next tax bill of £2,500.

So by 31 July 2016 you will have paid a total of £5,000 towards your tax bill for the year ended 5 April 2016 which will be picked up on your tax return due by 31 January 2017.

31 January 2017

On 31 January 2017 you submit your tax return for the tax year 5 April 2016.  Your tax bill for your earnings for this tax year is £5,500.

You can set your two payments on account made on 31 January 2016 and 31 July 2017 against this tax bill, therefore you need to pay £500 to settle up this tax bill.

However as per last year you need to continue making payments on account towards your next bill.  Therefore your next payments on account are due as follows:

31 January 2017 £2,750 (50% of your last tax bill of £5,500 PLUS £500)

31 July 2017 £2,750 (50% of your last tax bill of £5,500)

Saving for that tax

It’s so easy to forget about the payment on account.  The best thing we can suggest is to tuck a little away each month.  Keep an eye on your earnings and ask an accountant to help you estimate how much to put away each month in a deposit account, so it’s there ready and waiting.

What if Your Earnings Take a Dip?

If you are self employed or choose to stop being self employed and go back into full time employment, HMRC will still expect you to make payments on account even though you know your tax bill will be much lower.

In these cases you can notify HMRC about your change in circumstances and apply to reduce your payments on account.

Anita is a Chartered Accountant, turned blogger and creator of the ever popular free Go Self Employed Email Mini Course, which has been completed by hundreds of attendees all over the UK. Using her 10 years experience in accounting, tax and operations for Small Businesses, Anita is on a mission to make finance simple for the self employed, so they can stop stressing about tax & finances and focus on building profitable businesses which will give them the lifestyle they dream of.