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The 50% Payment on Account Dilemma

2 September 2009 No Comment

It’s normal for some people to make tax payments on account every 6 months

If you’re self employed, or have lots of income from rent, dividends or investments, you may have become used to the pattern of making tax payments every 6 months.

However, the way the rules are structured, it normally comes as a bit of a surprise the first time you encounter the the “payments on account” regime. PoA for short. If most of your tax is paid under PAYE you won’t need to worry about this. The rule is twofold:

  • If your PAYE tax deduction (and any sundry tax deduction) is more than 80% of your total tax bill, then PoA do not apply.
  • If your total tax payment for the year comes to less than £1,000 then PoA do not apply.

In all other cases, individuals (but not companies) will have to pay an instalment of tax every 6 months, on 31 January and on 31 July. And that normally applies to people who are self employed or have lots of income from rent, dividends or investments. The best way to explain this is to give you an illustration, based around the chart below. Let’s say that. . .

  • your taxable income first arose in the tax year 2015/16
  • your 50% payments on account are based on the previous year’s tax bill
  • as the previous year’s tax bill (2014/15) was NIL, you made no PoA on 31 Jan 16 and 31 Jul 16
  • when your tax return was finalised, your 2015/16 tax bill came to £999 and you paid that on the normal due date of 31 Jan 2017
  • that amount was below the £1,000 limit and so your PoA for 31 Jan 17 and 31 Jul 17 were also set at NIL
  • and then you go and have a really good year in 2016/17

201605310936dilemma

  • so good, that your 2016/17 tax bill comes to £8,888
  • now you’re caught
  • not only do you have to pay the 8,888 on the normal due date of 31 Jan 2018, but the PoA kick in at the same time
  • the first instalment of 4,444 for 2017/18 is due on the same day – 31 Jan 2018 – in this illustration that’s going to lead to a single payment of £13,332
  • and another £4,444 is going to be due on 31 Jul 2018
  • if the payments on account of £4,444 and£ 4,444 are not precisely right for 2017/18 then a TBA adjustment is made on 31 Jan 2019
  • that could mean more tax to pay, or a tax repayment
  • and the next 50% instalment will also be due on 31 Jan 2019, and so on

It sometimes looks like you have to pay 2 years worth of tax in the space of 6 months. It has often been said that “if you’re self employed you don’t pay tax for two years”. That’s sort of true, but then it all catches up with you and you end up paying two years worth of tax in the space of 6 months.

We know what you’re thinking and we’ve heard the message before. You can contact your MP here (use the search labelled “Find an MP by postcode”). We simply have to follow the rules!

The only way to keep things under control is to regularly put aside a tax reserve and to do your accounts and tax return soon after 5 April every year. Then there should be no nasty surprises.