HMRC Self Assessment payments on account

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Introduction

What are HMRC payments on account (HMRC POA), and how do they occur for contractor and director Self Assessment? When you’re a UK contractor running your own company, you may have to make POA to the tax office, depending on your overall income in the tax year. The HMRC Self Assessment payment on account system is there for those affected to make POA regarding the following year’s tax liability. Therefore, POA applies when you have a UK tax liability if you meet specific criteria. When this applies, you make an HMRC payment on account twice a year under the SA system. However, POA are on account of the following year’s tax liability. This guide will consider the POA system and how it applies. We’ll also research the process of how do I reduce my payments on account.

Contractor POA are advance payments of the following year’s tax bill. POA can arise when you have a tax bill for the current year. By tax bill, we mean you’re due to pay some tax as it hasn’t all been deducted at source. In other words, all your income isn’t PAYE salary. Therefore, a UK tax liability will arise if you have untaxed income, such as dividends, rental profits, self-employment income, repayments under student loans, or other untaxed income.

Therefore, let’s research an SA tax return for contractors and discover how POA work. We’ll look at paying your Self Assessment tax bill and what to consider for your HMRC tax payments. We’ll also research how to pay your Self Assessment tax bill and how to reduce payments on account. Indeed, this question often arises for taxpayers who file under HMRC SA. Therefore, let’s consider how you pay Self Assessment tax and how the POA system works.

Initial thoughts on payments on account

When you’re a director of your UK contracting company, you’ll complete your HMRC Self Assessment tax return each year. Also, as you complete your contractor Self Assessment (UK), please ensure you don’t make errors before filing this. When considering HMRC, contractor errors or mistakes will cause more issues later. Therefore, getting your contractor Self Assessment tax return right from the outset is best. This guide will focus on how Self Assessment POA work in practice. We’ll also investigate under HMRC, reduce payment on account and how to do this.

Once complete, you must file your contractor SA tax return with HM Revenue & Customs (HMRC). After you complete your contractor SA filing, you’ll know your tax liability and whether you must make any HMRC POA. Therefore, let’s research how POA for SA works in the UK.

Most limited company contractors who run their own company will let their contractor accountants file their contractor’s UK tax return. However, even when you run your own UK contractor limited company, it’s good to know how contractor SA works and other company taxes. Besides the HMRC payment on account system, ensuring you don’t make errors on your Self Assessment tax return is key. Our guide on UK contracting contains many other areas to consider when you’re in control of your own company.

What should you consider for payments on account?

When might POA apply?

First, as a company director and shareholder, you may have untaxed income in the future, such as dividends. When an individual has untaxed income such as dividends, self-employment income, rental profits, etc., they must register for SA. As a result, they’ll report all their income on an HMRC Self Assessment tax return.

You may be required to make POA for SA based on your total overall income. Therefore, when it comes to HMRC, contractors must make payments on account unless:

  • Your last SA tax bill is less than £1,000, and
  • You’ve already paid 80% or more of the tax you owe on your income. For example, you’ve tax deducted at source through your tax code on your salary. On the other hand, your bank may have already deducted tax on your interest income.

HMRC community forums also have questions from visitors regarding POA and HMRC responses.

When do you pay HMRC Self Assessment POA?

Under your contractor Self Assessment, HMRC will base the future POA on the previous year’s tax bill. The POA is made up of two equal payments. In addition, the total of both Self Assessment payments on account will equal last year’s HMRC SA total tax bill.

You may have to pay Capital Gains Tax (CGT) as part of your income tax return. This may apply if you’ve made any capital gains. You may also have to pay Class 4 National Insurance (NI) if you are self-employed. The POA are calculated based only on the previous year’s Income Tax bill. Therefore, your contractor POA doesn’t include any amount you owe for CGT or Class 4 NI.

Therefore, when paying Self Assessment tax, the amounts you pay are on account of next year’s Self Assessment tax bill. The balancing payment from the previous year and SA first payment on account are due by midnight on 31 January. The second HMRC SA payment on account is due by midnight on 31 July. Once you complete your tax return for the next tax year, you’ll be due to make a Self Assessment balancing payment by 31 January. On the other hand, you may be due a refund. This will be the case if you’ve paid too much tax via POA.

Example of payments on account

Suppose your total tax liability for the 2023/24 tax year is £15,000. This is payable in full by 31 January 2025.

In turn, your POA for 2024/25 are based on your 2023/24 liability. Therefore, you must make an advance HMRC payment on account of £7,500 twice. These are due by 31 January 2025 and by 31 July 2025.

You may be paying HMRC Self Assessment payments on account as set out above, and you’re earning less in the current tax year than in the previous year. Therefore, you should consider if you can apply for an HMRC payment on account reduction. As a result, you’ll pay the reduced payments on account to HMRC instead.

You can ask HMRC to reduce your POA (please see below) to make a reduction. If you don’t request a reduction, HMRC will assume you’ll have earnings at the same rate in 2024/25 as in 2023/24.

The above may be somewhat of a shock when you’re new to contracting. However, it’s how the POA system operates. Therefore, when paying your Self Assessment, you must budget for paying tax on account of the following year when you start out contracting.

How does the payments on account system work?

Once you make your first HMRC POA Self Assessment tax return payment for 2024/25 by 31 January 2025, you’ll effectively be in credit with HMRC. The second HMRC tax return payment on account is due by 31 July 2025, with any balancing payment (HMRC) for 2024/25 payable by 31 January 2026. HMRC will refund any overpayment if your liability is less than the £15,000 in the above example.

In the above example, if your tax liability in 2024/25 is £18,000, you’ll pay the additional HMRC balancing payment of £3,000 to HMRC by 31 January 2026. If your actual liability is £13,500, HMRC will refund you the £1,500 overpayment.

The above may seem a little confusing. However, your accountant should be there to help and guide you through this and your contractor tax return filing.

HMRC -reduce payments on account

How can I reduce my POA?

If your income will reduce in the following tax year, you should consider how do I reduce my payments on account. As mentioned, under the HMRC SA system, it’s possible to make a claim to reduce POA for the following tax year. When we consider how to reduce your POA, you can apply for this via your Self Assessment account on the HMRC website online. You can inform HMRC of this on your contractor tax return. However, you should only go about reducing POA if you’re reasonably sure your taxable income will decrease in the next tax year.

When can you reduce your payments on account?

When you know your HMRC POA for the following year, you might think about reducing these. It could be tempting to do this without considering the appropriate factors. If you reduce POA, you reduce your tax burden. Please consider this carefully first, though. If you reduce your payments in the future and it turns out they’re too low, that’ll create an issue as you’ll have underpaid tax. As a result, HMRC charges interest if you pay the HMRC Self Assessment tax POA late.

If required, your accountant can apply to reduce your POA. HMRC will issue a refund if you don’t reduce your POA and your tax liability for the following year is lower than the current year.

Other thoughts

How to pay HMRC Self Assessment tax?

When you come to making payment of your Self Assessment payments on account or your balancing liability or indeed any other tax underpayment, you can:

  • Make a payment to HMRC Self Assessment via your internet banking. Before you make your contractor payment of SA tax, please refer to this HMRC guide online for the HMRC Self Assessment bank details. Basically, the HMRC Self Assessment payment details show which sort code and account number to use and the reference to quote when you’re paying HMRC Self Assessment tax.
  • You can pay HMRC online via a debit or credit card on their official website. Many taxpayers pay HMRC Self Assessment online via the HMRC website. You can view their accepted payment methods when you visit their website. It’s easy to pay your HMRC Self Assessment bill online via internet banking once you have HMRC’s bank details and know your payment reference.

What if you’re struggling to pay your SA tax? 

If you know your tax bill and POA and cannot meet them, you could contact HMRC. Indeed, when you do, you can ask them about an HMRC payment plan (Self Assessment). If you assure HMRC you’ll stick to this, they should allow it to be set up.

Your own online personal tax account with HMRC

Under SA, you can check what you owe to HMRC at any time by setting up an online personal tax account with them. You can then look within your account at how to add Self Assessment to your personal tax account. Once you’ve added this, it’ll show your tax liabilities. You can use your HMRC Self Assessment login to access your account anytime. Therefore, when you log into your HMRC Self Assessment account, this will show your current liability. Your HMRC personal tax account will also show any POA payable. If you decide to reduce your POA, you can log into Self Assessment to make sure HMRC update this. In addition, there’s other helpful information in your HMRC online account, such as tax codes and state payments.

Final thoughts

This guide explains how Self Assessment payments on account work for UK contracting professionals. As mentioned earlier, you’ll be required to make payments on account if your tax liability to HMRC is more than £1,000 and less than 80% of the tax you owe hasn’t already been taxed at source. Often, a UK limited company contractor may ask how do I reduce my payments on account, and we explain the process here.

Depending on your monthly drawings/dividends from your company, you should save for any personal tax as you go along in a personal savings account. Then, when the tax becomes due in the future, you can make the relevant HMRC payment (Self Assessment).

In tax, HMRC treats dividends as the top slice of your income in your tax calculation. Any dividends in your basic rate tax band will incur Basic Rate tax at 8.75%. Meanwhile, any dividends in the higher rates tax bracket (gross income above £50,270) will incur a higher rate tax of 33.75%. If you’re lucky enough to earn over £125,140 per annum in 2023/24, the additional higher rates tax is 39.35% on dividends above this amount.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Member Only Articles (Technical!), Self-Assessment /

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