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What is Payment on Account?

What is Payment on Account?

If your Income Tax and National Insurance (NI) liability is over £1,000 you are likely to find yourself making Payments on Account (POA). If unprepared, the first year this happens can be daunting. There is no denying that you will look at your Return and find it hard to believe that it is correct.

Payments on Account are based on HMRC’s belief that your profit next year will be similar or higher and require you to make payments towards the next years liability. HMRC calculate Payment on Account by taking your current liability and halving it, these payments are due in January and July following the tax year end.

Example

In John’s first year of trading his Tax Return ending 5th April 2022 shows a Tax and NI Liability of £3,000. This also means that he now has Payments on Account to make of £1,500 each. John’s payments are as follows:

• Due 31st January 2023 - £4,500 (£3,000 liability plus £1,500 first POA).

• Due 31st July 2023 - £,1500 (second POA)

In year two, John’s Tax Return ending 5th April 2023 shows a liability of £4,500. However, he has already paid £3,000 towards this amount (2 payments of £1,500). This means that his payments are as following:

• Due 31st January 2024 - £3,750 (£4,500 liability minus the POA already made £3,000, plus next year’s first POA £2,250)

• Due 31st July 2024 - £2,250 (second POA) Payments on Account are estimates and can be amended if you believe that your profit for the following year, will be lower than the current one.

This is one of the reasons to always keep your business income and expenses up to date, so you can quick and easily check how your profit for the year is looking.

If you have any questions on this or anything else please do contact us. You can all us on 03449844445 or email info@fbtc.co.uk