If you submit a UK tax return and you owe more than a thousand pounds, then be aware of payments on account.

Payments on account are a topic that is not properly talked about or understood, but it can catch out taxpayers.  In this episode I am going to dive deep into payments on account.

Firstly, I will look at what Payments on account are, how they are calculated, how to reduce them and when you have got to pay them.  Secondly, my friends Rishi and Boris will be helping me with numbers and dates.   Finally, I will look at the general framework of how the UK personal tax system works.

Listen to find out more.

Your Income and tax that is deducted 

Are you self-employed, a landlord who might have some rental income being a director, shareholder who has income by way of dividends?

Be aware that some you make ends up in your pocket without has not had tax taken off when you earn it. There is more responsibility on your shoulders to make sure you have put enough by to cover your taxes.

We are here for you! We will help you with all the little things like saving for your taxes and making sure they are taxed at source so there are no surprises come tax time.

Tax calculators

Are you looking for a way to calculate your taxes?

You have come to the right place! We have online calculators that will do all the heavy lifting for you. All you need is some basic information about your income and deductions, and we will take care of the rest. It could not be easier.

This tool can help make filing taxes less stressful by doing most of the work for you. If this sounds like something that would be helpful to you, go ahead and give it a try today!

Click here now to use our free tax calculator!

What next

Moreover, do you want to know more about payments on account?  This podcast tells you what you need to know about payments on account, calculations, tips, and advice

Listen to find out more.

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If you submit a UK tax return and you owe more than a thousand pounds, then be aware of payments on account. If you're not prepared for this, then your bank balance and your nerves will experience a nasty shock.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. My name is Mahmood and for over 26 years I've been helping businesses like yours navigate the world of numbers, improve your profits, save tax and time, and above all, improve your well-being. Now, in today's podcast of I Hate Numbers, it's all about payments on account. It's a topic that's not properly talked about or understood, so I do appreciate it's not a natural dinner-party conversation.

I'm going to dive deep into payments on account. We're going to look up what they actually are, how they are calculated, what you can do to reduce them, and when you've got to pay them. Now, to help me with this, I'm going to call upon my friends, Rishi and Boris, to actually demonstrate the payments, how they work with some dates and some numbers as well.

Now, before we dive deeper into payments on account, let's have a look at the general framework of how the UK personal tax system works. Now, if you have money that you are receiving, that's not been taxed before it ends up in your pocket, then you must register with HMRC. HMRC represents Her Majesty’s Revenue and Customs, which is a very long-winded way of saying the tax office.

Once you register, when it comes time, you must complete a personal tax return. It's within the system called self-assessment, which means you tell HMRC what you've been up to, and I don't mean your hobbies, or movies you've seen, or what you've had for dinner, but it's about what your income has been for the year in question.

If you've had any capital gains for that year in question, fill that in, work out the tax, make sure you submit it by the relevant dates, and if there's any money to pay, make sure you pay on time. If you don't do so, by the way, the stick comes out, HMRC will wrap you over the knuckles, ask for the money, and charge you interest, and possibly penalties.

Now, let's introduce my two friends, Rishi and Boris. What they have in common, they're both self-employed. They both make profits subject to tax around about 25,000 pounds a year. They both have got to send in tax returns for the year 2021, and it works out that tax bill is estimated at around 4,000 pounds. Now, if you're listening to this and thinking, how did I work that out, apart from introducing a knowledge of tax here, I'm going to share a resource with you in the show notes where you can punch the numbers into a free online calculator, as soon as you typed in those numbers,

the tax figure will appear in front of you. So, don't worry too much about having to do the heavy lifting of calculations. Now, Rishi started his business as a full-time self-employed tax advisor in April, 2020. He had to register for self-assessment and for him, his first tax return that he has to complete and send in will be covering the 2021 tax year, and 2021

tax year is income between the 6th of April, 2020 and the 5th of April, 2021. If we talk in terms of dates, his deadline for sending in his tax return is the midnight of the 31st of January, 2022. He's got to pay any tax that's due by the 31st of January, 2022, midnight, and also, if payments on account kick in, he has to make two installments, two payments of his payments on account.

I'll throw some numbers in later on just to demonstrate what we're talking about. Now, Rishi, as we said earlier, owes 4,000 pounds worth of tax and national insurance, and because he owes more than 1,000 pounds worth of tax, the regime of payments on account, or POA to give it a nice short acronym, kicks in.

Now, the good news, if you can call it that, is that additional 4,000 pounds on top of his tax bill is payable in two installments, two equal installments of 2,000 pounds each. So, let's summarise what we have so far for Rishi. His tax bill is over a thousand pounds, at 4,000. That triggers payments on account. The total payments on account overall will be four grand, and he pays those payments on account in two installments. One on

the 31st of January, 2022, and the second one on the 31st of July, 2022. Now, if you're sitting at home thinking, this sounds like a bit like daylight robbery here, he's got a tax bill, he's got to pay more, the payments on account that Rishi is paying and any taxpayer will pay is money you are paying upfront to HMRC

for your future tax bill, and what HMRC are basically saying is, give us the money for next year's tax bill, but we want to collect it before you complete your tax return. So, this is good for them. They get cash flow. This is good for them because it means there's less chasing you up. It's also good for you as a taxpayer, by the way, because it sharpens the mind and focuses that you've got to make payments.

At the end of the podcast, I'm going to share a tip with you about how you can mitigate and actually make sure that you've got enough money to pay your tax bill. Now, the payments on account, I'm going to talk to you later on in this podcast. There is the opportunity, the possibility that Ruhi can reduce those payments,

but more of that later. Now, let's contrast that with Rishi's friend, Boris. Now, Boris has been self-employed. The only difference is that Rishi has been self-employed for several years as a writer and a speaker on Greek history. Now, Boris asks Rishi to prepare his tax return for him. Rishi announces that Boris, because his profit levels are at 25K, owes also tax of 4,000 pounds.

Now, the same principle will apply for Boris with a little twist. Now, because Boris has been self-employed for several years, he's used to this regime of payments on account. So, when Boris had his tax return prepared last year, when he sent it in for the 2019/2020 tax year, at that time, his tax was such that his payments on account were a mere 800 pounds each.

So, Boris, being the good citizen, would've made his first 800-pound installment by midnight January, 2021. The second payment on account he would've made by midnight, 31st of July, 2021. So, by the time it comes to settle his 2021 tax bill, Boris has already paid 1600 pounds towards that. So, by the time we fast forward to midnight, 31st of January, 2022, Boris has to find

the money to pay his tax of 4,000. He can deduct the 1,600 pounds he's got, he's paid already, so, therefore, he's only got to find 2,400. Now, like Rishi though, Boris has also got to make two installments of payments on account of 2,000. The first one, 31st of January, 2022. The second one, the 31st of July 2022. So, let's summarise before we move on the situation for both taxpayers. Rishi, brand new taxpayer, a tax bill of 4,000 that's got to be paid,

00:07:3

He's already been making payments on account, so what he's got to settle is offset and reduced by the payments on account he's made already. Like Rishi, though, he's still going to make those payments on account of two grand a time. I said at the beginning of the podcast, there's the opportunity of the taxpayer reducing their payments on account.

Now, here's the system of payments on account and what HMRC will say is: Okay folks, we want you to pay towards next year's tax bill. We are assuming, notice the word assuming, that next year's tax bill is going to be in line with this year's tax bill. Now, we know that the future doesn't always follow the past, so there could be a number of reasons why

the tax that you pay for the following year may not be at the same level. Now, if it's likely that your tax bill in the following year is going to reduce. Perhaps you've got a change of direction in your business. Perhaps profits are not going to be as healthy. Perhaps you've got additional allowances. Perhaps you've tapped in to some tax planning here, and there are ways to mitigate and reduce

your tax bill. Now, if you anticipate, if you estimate that your tax bill will be lower, then you can reduce your payments on account. Good news, there is a but, a thing you, one needs to be really, really careful of. HMRC say you are making the judgment call if you think your tax bill is going to be lower. By all means, reduce your payments on account.

However, if it transpires that you've incorrectly estimated, or fortunes favor you, and your self-employed business takes off, improves, makes more money next year, then you would've innocently calculated a reduction in payments on account that's too much. So, HMRC as a bare minimum will expect interest of you for that underpayment.

The second thing you've got to be aware of, if you are recklessly making those reductions for whatever reason, and if HMRC suspect you are being a bit naughty, you're taking the my call, they do have the opportunity of actually leaving a penalty on top of it. The whole idea is like a game of dare if you think it's going to go down,

if you've got good reasons for doing that, you tap into a good tax advisor, you've got a good knowledge, by all means, reduce them. You can always change these things over time, but that's the reduction that you can make. Obviously, if profits are likely to carry on improving, then there is no flexibility necessarily to reduce those payments on account.

Now, to wrap up and a few tips to share, folks. The big difference between being self-employed, being a landlord who might have some rental income, being a director shareholder who has income by way of dividends, is that money that ends up in your pocket, that money that ends up in your bank account, has not had tax taken off it as though it was PAYE.

So, therefore, there's more responsibility on your shoulders to make sure you've put enough to cover your tax bill. My advice would be hop on, click into the show notes. There's a link to a free online calculator, whereby a few seconds of your time punching some numbers, and it'll give you an indication of what your tax bill will be and what your payments on account will be.

The second thing I would say, look at what your situation has been for how much tax you're paying against how much revenue, and as a rule of thumb, you put a percentage of what you bill your clients a way to cover your tax bill. What you should do is to get into the habit of saving. Every time you raise an invoice and you bill a client, every time you receive money from a client, from your dividends, put a proportion of that away in a separate account, and save towards your tax.

When the time comes to figure out how much you owe, hopefully, you've collected, you've saved all the money necessary. If you’ve saved too much, there's a nice little windfall. If you haven't saved enough, at least the pain, the gap is not going to be too dramatic to make up. Folks, I hope you found this useful. I hope you got some value from this podcast.

I love sharing the world of numbers. I love sharing the advice, and I hope that it's practical and applicable. If you've loved the podcast, if you've liked the podcast, I would appreciate it if you could share that. Make comments. If you've got suggestions for a future podcast episode, something that you would like to add, by all means, flag it up to me.

Apart from that, folks, keep an eye on your payments on account, keep an eye on your tax bill, check out the show notes, and until we see each other next week, have a great week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.