What are payments on account?

One thing that often catches people out are payments on account, particularly in the early years of their business.

Payments on account are advance payments of tax, which count towards the following tax year.

In January 2015 people will be paying their tax for the year ended 5th April 2014 but also making their first payment on account for the year ended 5th April 2015. The second payment on account will be due by the end of July 2015.

Of course, the year ended 5th April 2015 hasn’t ended yet so these payments on account are estimated assuming the tax position would remain the same for 2015 as it was for 2014.

This is where people can be caught out, having to find 150% of the tax they thought was due in January in order to include the first payment on account. The second 50% payment on account falls due in July, but by then the tax year has ended and the exact position should be known.

As payments on account are estimated then can be reduced should the profit for the next year be expected to reduce, perhaps due to investment in the business or a reduction in one-off income from last year.

In order to reduce the payments on account an application is made to HMRC, however should they be found to have been reduced too much then penalties will apply.

It is therefore important to correctly estimate the tax due for 2014/15 as far as possible, and also to complete the 2015 return as soon as possible after 5th April 2015 so that the calculations can then be finalised before the second payment on account falls due.

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