These advance payments to HMRC are made twice a year by eligible people who file their taxes using self-assessment – the first one was due on 31 January. Those who don't settle the bill on time face a penalty and a hefty interest charge of 7.75% on any money owed.
Here, Which? explains what taxpayers need to know about payments on account and the rules around missing deadlines.
What are payments on account?
It mainly applies to self-employed workers whose last self-assessment tax bill was more than £1,000, as long as you haven't already paid more than 80% of all the tax owed. For example, that could be through your tax code or because your bank has already deducted interest on your savings.
The payments on account system also applies to those who have rental property income or other sources of untaxed income that exceed the threshold set by HMRC.
There are two payments a year, due by:
Don't forget, 31 January is also the deadline for filing your self-assessment tax return and paying any outstanding balance from the previous financial year.
Find out more:How much will I owe?
Each payment is half of what you paid in the last financial year, under the assumption that you'll owe roughly the same amount of tax in the following year. If you still owe tax after this has been paid, a further 'balancing payment' may be due by 31 January of the following year.
For example, let's say your bill for 2022-23 came to £5,000 and you paid by the deadline of 31 January 2024. On top of that amount, you'll have had to pay £2,500 for your first payment on account and the second instalment at the end July will be another £2,500.
By the time next January comes around, you'll just be paying £2,500 on account, since the previous year's tax bill will, in theory, already be covered.
If after totting up the actual amount of tax due for 2023-24, the two advance payments don't cover what you owe, you'll then need to make a further balancing payment on 31 January 2025. If you've paid too much tax, you'll be owed a refund.
What happens if you don't pay on time?
There is no £100 fine for being late in July, but interest is charged on the amount owed. That currently stands at 7.75% because it's set at 2.5 percentage points above the Bank of England base rate.
HMRC also imposes the following late payment penalties:
Four tips for paying your tax bill
Whether you're new to the process or an old pro, here are some handy tips to help you get on top of payments on account and make the next instalment before the deadline.
1. It's possible to reduce the bill
Self-employed income can fluctuate from year to year, so if you know the amount of money made has definitely fallen for the period in question then you can ask HMRC to reduce your payments on account.
You won't need to provide evidence that your tax bill will be lower. However, if you reduce your payments on account and it turns out that you owe a much higher figure, HMRC could charge you interest on the difference.
2. Ask for help if needed
The idea behind payments on account is to help taxpayers stay on top of their finances, breaking down the amount due by 31 January into two smaller payments spread throughout the year. However, the payment can come as a surprise to newly self-employed people, particularly in the first year.
There's no 'standard' Time to Pay arrangement, so your payments and time period will be decided based on your needs.
3. Budget carefully
Take a look at what you earned in the past three months and calculate the average. That should give you a rough idea of what you might expect to earn in the coming months.
4. Plan how you will pay
There are several ways you can pay your bill, although HMRC doesn't accept personal credit cards and you can no longer pay your tax bill at the Post Office.
To get the payment to its destination on the same or next day, use Chaps or Faster Payment, online and telephone banking services, a debit card or business credit card. Paying by Bacs or by cheque in the post can take around three days, but cheques could take much longer to arrive if there are postal delays.
source https://www.which.co.uk/news/article/self-employed-tax-deadline-how-to-avoid-interest-charge-aeppu5a2eF3y