What are Payments on Account?

Income tax is a tax that is levied on the income or profits earned by individuals and businesses. In most countries, income tax is a significant source of revenue for the government and is used to fund various public services and programs. 

 

One of the ways that individuals and businesses can pay their income tax is through a payment on account. A payment on account is an advance payment of income tax that is made during the tax year. It is typically required for individuals and businesses who owe more than a certain amount in income tax for the current tax year. 

 

There are two payments on account that are typically required: one that is due on January 31st and another that is due on July 31st. These payments are based on the previous tax year's tax liability and are typically equal to half of the tax liability for the previous tax year. 

 

For example, if your tax liability for the previous tax year was £10,000, you would be required to make two payments on account of £5,000 each (one on January 31st and one on July 31st). These payments would be applied to your current tax year's tax liability. 

 

It's important to note that payments on account are not a substitute for your annual tax return. You will still need to file a tax return for the current tax year and pay any remaining tax that is due. If your payments on account are more than your tax liability for the current tax year, you may be eligible for a refund. 

 

If you are self-employed or have untaxed income, you may be required to make payments on account even if you did not owe any tax in the previous tax year. In these cases, the payments on account are based on an estimate of your tax liability for the current tax year. 

 

If you are unsure whether you are required to make payments on account or have questions about how to calculate your payments, you should contact your tax authority or seek the advice of a tax professional. 

 

In summary, payments on account are advance payments of income tax that are required for individuals and businesses who owe more than a certain amount in income tax for the current tax year. These payments are based on the previous tax year's tax liability and are typically made in two installments, one on January 31st and one on July 31st. It's important to remember that payments on account are not a substitute for your annual tax return and you will still need to file a tax return and pay any remaining tax that is due. 

 

You can read more about this with a worked example on HMRC's website - Understand your Self Assessment tax bill: Payments on account - GOV.UK (www.gov.uk) 

 

If you want to discuss payments on account or income tax with the My Cloud team, get in touch with us for our expert advice!