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Understanding HMRC's Payment on Account Scheme
Did you know that if your income tax bill exceeds £1,000 for the first time, you'll need to pay 150% of your tax bill upfront? This is part of HMRC's Payment on Account scheme. Let us explain how it works.
How HMRC Gets Paid
When you're employed, your taxes are deducted from your pay check either monthly, weekly, or bi-weekly. HMRC receives your tax money almost immediately. However, if you're self-employed, you can go a whole year, up to almost 2 years, without paying any taxes. To address this, HMRC created the Payment on Account scheme to receive tax payments more promptly.
What is Payment on Account?
Payment on Account splits your tax bill into two payments. You make these payments twice a year: January 31st and July 31st. The first time you make a payment on your account, you might be surprised. You don't just pay for the past year's taxes—you also pay an extra 50% (150% in total) as an estimate for the upcoming tax year.
Breaking Down the Payments
Here's how it works in detail:
- First Payment (With a deadline of January 31st): You pay your full tax bill for the previous year, plus an extra 50% as an estimate for the current tax year.
- Second Payment (With a deadline of July 31st): You pay another 50% of the previous year's tax bill.
Three Year Example:
Let's break down the first three years of a business and how the payments will work using simple numbers:
“PDL” means Payment Deadline
Tax Year 1:
- April 2023 - March 2024: Business earns income.
o (It doesn’t matter when exactly the business started earning income it just depends on what tax year it falls into. April 1st – March 31st)
Tax Year 2:
- April 2024 - March 2025: Business continues earning income.
- Tax bill for tax year 1 + payment on account (PDL January 31, 2025):
o Tax Bill for Year 1: £1,000
o 50% Payment on Account for Year 2: £500
o Total Payment: £1,500
- Payment on Account (PDL July 31, 2025):
o 50% Payment on Account for Year 2: £500
o Total Payment: £500
Year 3:
- April 2025 - March 2026: Business continues earning additional income.
- Tax Bill for year 2 + (PDL January 31, 2026):
o Tax bill for year 2: £1,200 (assuming an increase in income)
o Payment on Account already paid: £1,000 (January 25 + July 25)
o Balance due: £200
o 50% (of the £1200 tax bill) Payment on Account for Year 3: £600
o Total Payment: (£200+£600) = £800
- Payment on Account (PDL July 31, 2026):
o 50% Payment on Account for Year 3: £600
o Total Payment: £600
Why Do HMRC Estimate?
HMRC estimates your tax payments based on the assumption that you'll earn the same amount next year. If you expect to earn less, you can contact HMRC to reduce your payment on account. This scheme helps you pay your taxes closer to when you actually earn the income, making it easier to manage your finances.
Pro Tip: How to always have enough money to pay your tax bill.
A top tip from Blue Rocket Accounting: Whenever you earn income from your business, set aside a percentage into a high-interest savings account. This ensures you have enough money to cover your tax bill when it arrives.
A good base to start is putting away 20% of your profits, however, this may be different depending on the level of income to receive and current tax laws.
Want more help with your self-assessment or limited company accounts?
Blue Rocket Accounting help thousands of businesses around the Dartford, Sidcup, Maidstone, Gravesend, Sevenoaks and Erith area. No jargon, proactive, with expert advice.
You can read more about the services that we provide here Business Services | What We Do | Blue Rocket (bluerocketaccounting.com)
Or contact us to arrange a free initial chat on 01322 555 442, or email happytohelp@bluerocketaccounting.com now.
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