At the end of this month the second payments on account for the 2022/23 tax year will be payable to HM Revenue and Customs for individuals who are liable to pay them. But, why do some people have to pay them and how are they calculated?

Payments on account are a way for individuals in the UK to pay their income tax in advance, spread over two instalments, to avoid a large tax bill at the end of the tax year. The UK tax year runs from April 6th to April 5th of the following year. Payments on account are applicable to individuals who meet certain criteria, including having a tax liability above a certain threshold.

Here’s how it works:

1. Initial Payment on Account: On January 31st of each tax year, you are required to make the first payment on account for the current tax year. This payment is based on your tax liability from the previous tax year. Each payment on account is typically 50% of the tax due for the previous tax year. So, if you owed £2,000 in income tax for the previous year, your first payment on account would be £1,000.
2. Second Payment on Account: The second payment on account is due on July 31st, exactly six months after the first payment. Like the first payment, it is also calculated as 50% of the tax due for the previous year. So, you’ll make another payment of £1,000 on this date.
3. Adjustment at Year-End: After the tax year ends on April 5th, you (or your accountant) will calculate your actual tax liability for the current tax year by considering all your income, deductions, and allowances. If the payments on account you made were more than your actual tax liability, the excess amount will be refunded to you. However, if the payments on account were less than your actual tax liability, you will need to make an additional payment to cover the difference by January 31st of the following year.

So, using actual dates, if your tax liability for the year ended 5th April 2022 was £2,000, the following payments on account towards the year ended 5th April 2023 would be due;

1st Payment on account payable by 31st January 2023              £1,000

2nd Payment on account payable by 31st July 2023                    £1,000

Once you prepare your tax return for the year ended 5th April 2023 you will know your actual tax liability. If it is more than £2,000 the additional tax to pay will be due for payment to HMRC by 31st January 2024. However, if your liability is below £2,000 you will be due a repayment. This repayment may be refunded directly to you, or if payments on account are due towards the year ended 5th April 2024, HMRC may offset this repayment against the first payment on account towards the 2023/24 tax year which will be payable to HMRC by 31st January 2024.

It’s essential to understand that payments on account can sometimes lead to overpaying taxes, especially if your income fluctuates or decreases in the current tax year. If you believe your income will be lower in the current year and that the payments on account will be too high, you can apply to reduce the payments. However, if you choose to do this you must be aware, if your tax liability ends up being higher than the amount you reduced your payments on account to, interest will be payable on the difference.

If you expect your tax liability for the following year to be lower, we would recommend preparing your tax return before the end of July as it may be that the second payment on account due at the end of July can be reduced.

Generally, anyone with an income tax liability over £1,000 is required to make payments on account, there are exceptions however, including where more than 80% of the tax you owe is collected through employment income.

If payments on account are paid late, interest will be added to the amount due.

In summary, payments on account are a way to pay your UK income tax in advance to avoid a lump-sum payment at the end of the tax year. By understanding the process and planning accordingly, you can manage your tax obligations more effectively.