Why am I being asked to pay my tax twice?
If you are self-employed, a partner in a partnership or have other income that is not taxed at source, one of the biggest surprises when you first complete a Self-Assessment tax return can be the size of the January tax bill.
You may have expected to pay the tax due for the year.
Instead, you could be asked to pay that tax plus a payment towards next year’s tax bill. This is known as a payment on account.
Understanding how it works is important because, with a little planning, you can avoid being caught out by a large January or July payment.
What is a payment on account?
HMRC uses payments on account to collect your tax in advance.
They are normally based on your previous year’s Self-Assessment tax liability.
Each payment on account is generally 50% of the previous year’s tax bill, with two payments made each year:
- 31 January – the first payment on account
- 31 July – the second payment on account
There can therefore be three amounts involved when you first become subject to payments on account:
31 January:
Tax owed for the previous tax year + first payment on account
31 July:
Second payment on account
Following 31 January:
Any balancing payment, plus the next year’s first payment on account
Here’s a helpful example
Imagine your Self-Assessment tax liability for the year is £10,000.
Your January bill could be:
£10,000 – tax for the year just ended
£5,000 – first payment on account for the following year
£15,000 total
Then, on 31 July, you would normally pay another £5,000.
So although your annual tax liability is £10,000, your first January payment could be
£15,000.
This is why the first year of Self-Assessment can come as such a shock.
What happens if your profits increase?
This is where planning becomes particularly important.
If your business is growing, your tax bill may increase from one year to the next.
For example, if your tax liability rises from £10,000 to £14,000, you could have a balancing payment of £4,000 in addition to your normal payment on account.
Your January payment could therefore look something like:
£4,000 – balancing payment
£7,000 – first payment on account for the next year
£11,000 total
This is why simply looking at last year’s tax bill isn’t enough.
You need to understand what your current year’s profits are likely to be.
Can payments on account be reduced?
Potentially, yes.
If you have good reason to believe your tax liability will be lower in the following year, you can apply to reduce your payments on account.
For example, perhaps:
- Your business profits have fallen
- You have stopped trading
- You have lost a significant source of income
- You have made larger pension contributions
- Your circumstances have otherwise changed
However, reducing payments on account simply because you don’t want to pay the money yet can create another problem.
If you reduce them too far and your eventual tax liability is higher, you may have to pay the difference later and potentially interest.
The Profectus view
The important point: plan ahead
Your tax bill shouldn’t come as a surprise.
If your business is profitable and growing, we can estimate your likely tax liability before the Self-Assessment deadline and help you understand how much cash you should be putting aside.
At Profectus, we believe your accountant should help you understand what is coming next, not simply tell you what happened last year.
Need help planning your tax bill?
If you’re unsure what your January or July payment is likely to be, or you’re worried about finding the money when the deadline arrives, speak to us.
We’ll help you understand the numbers and plan for the tax before it becomes a problem.
