In the UK, income tax is collected from the taxpayers in different ways, including:
- Tax deductions at source throughout the year. This is usually the way the tax is deducted from those working as an employee. The tax at source is deducted by the employer and is paid to HMRC by the employer.
- Balancing payment for the tax year (tax due less tax already paid) calculated in the tax year and due by 31 January following the end of the tax year
- Advance Payments on account are calculated based on the last year’s tax due, which was not deducted at source. There are two payments on account payable which are due by 31 January before the end of the tax year and 31 July following the end of the tax year.
Most UK taxpayers have their tax deducted at source through PAYE by the employer. Balancing payment and payments on account are due if you are required to file your self- assessment tax returns.
What is payment on account?
Payments on account are advance tax payments for the next tax year and apply to the self-assessment taxpayers whose majority of the tax hasn’t been deducted at source. You will be required to make two payments on account, which will be half of your previous year’s tax bill.
For example, if a person has a tax liability of £2,000 for the tax year 2022/23, he will be required to make two advance payments on accounts for the next tax year 2023/24 of £1,000
each.
Why do I need to make payments on account?
If most of your tax hasn’t been deducted at source, you will be required to make the payments on account for the next year in advance. Employees usually pay their taxes at source and are not required to file self-assessments and make payments on account. In contracts, self-employed individuals, buy-to-let landlords etc, don’t pay their taxes at sources. Therefore, they are required to file their annual self-assessment tax return and may also be required to make payments on account.
How the payments on account are calculated?
The payments on account for a tax year are calculated based on the taxpayer’s income tax and class 4 liability (if any) for the previous year. There are two payments on account due for a tax year. Each payment on account is 50% of the income tax and class 4 liability of the previous year.
For example, George has the following tax liabilities for the tax year 2021/22:
2021/22 Tax Year
| Income tax liability | 15,000.00 |
| Less: tax deducted at source | (7,000.00) |
| Balancing payment due for 2021/22 | 8,000.00 |
For the tax year 2021/22, the taxpayer is required to make the balancing payment of £8,000. This is due by 31 January 2023. In addition to this, he is also required to pay two payments on accounts for the next tax year 2022/23. The two payments on accounts of £4,000 each will be due by 31 January 2023 and 31 July 2023. Please find below the table showing liabilities payable:
Summary of tax liabilities
| Tax year | Due Date | £ | |
| 2021/22 | 31/01/2023 | Balancing payment | 8,000.00 |
| 2022/23 | 31/01/2023 | Advance payment on account (50% of £8,000) | 4,000.00 |
| Total payable by 31/01/2023 | 12,000.00 | ||
| 2022/23 | 31/07/2023 | Advance payment on account (50% of £8,000) | 4,000.00 |
Tax Year 2022/23
Now lets assume that George has the tax liability of £18,000 for the tax year 2022/23. As you know that he has already paid two advance payments on account of £4,000 each for this tax year’s liability, which means his balancing payment would be £10,000. The balancing payment means remaining tax liability for the tax year 2022/23. I have entered his tax summary positions as below:
Tax Position for the tax year 2022/23
| Tax year | £ | ||
| 2022/23 | Tax liability | 18,000.00 | |
| Less: Advance payments on account already made | |||
| Payment made on 31/01/2023 | (4,000.00) | ||
| Payment made on 31/07/2023 | (4,000.00) | ||
| Balancing payment due by 31/01/2024 | 10,000.00 |
Do I always need to make the payments on account?
The payments on account are required to be paid if:
- Your self-assessment tax liability for the tax year is more than £1,000 or
- less than 80% of the tax liability is deducted at source
Let’s suppose you are receiving untaxed income (e.g., dividends, property, or self-employment income) where the tax hasn’t been deducted at source.
You received your 2021/22 tax return from your accountant, showing a tax liability of £950. No payment on account will be required for the next year 2022/23, because your tax liability is less than £1,000.
Now let’s suppose you receive a higher untaxed income in the tax year 2022/23, and your tax liability as per your self-assessment tax return is £2,500. As your tax liability is more than £1,000, you must make two payments on account of £1,250 (50% of £2,500) for the tax year
2022/23.
For example, if a person has employment income only and is required to file the self-assessment tax return, he will NOT be required to make payments on account as the employer deducts all of his tax at source.
When the Payments on Account are due?
There are two payments on accounts due. The first payment on account is due on 31 January before the end of the relevant tax year, and the second payment on account is due on 31 July following the end of the relevant tax year. For example, the payments on accounts for the Tax year 2021/22 (Period: 6 April 2022 to 5 April 2023) is due by the following dates:
- 31 January 2023 (before the end of the tax year)
- 31 July 2023 (following the end of the tax year)
How to make the payment on account?
There are a few ways you can pay the payments on account to HMRC. You just need to ensure that you give enough time for the payment to be processed so that it reach HMRC on time before the deadline. You can find the details on how to make the payments in the link below:
How to reduce payment on account
The business income or untaxed income of the taxpayer can vary from year to year. If an individual believes that his tax liability for the next tax year will be less than the required Payments on accounts, he can request HMRC to reduce his payments on account via his self-assessment tax return or through your personal tax account online.
