If you’ve recently had notification from HMRC saying that you have a second payment due for the year 2016/17 on 31 July, this is known as a ‘payment on account’.
Each payment on account is half the amount of Income Tax and class 4 National Insurance that some business owners have to pay to HMRC for a future tax year. If your Income Tax and class 4 National Insurance total more than £1,000 for a tax year and you don’t pay tax at source on more than 80% of your income, you’ll have to make payments on account.
Here, Emily Coltman FCA – chief accountant at FreeAgent, which makes award-winning cloud accounting software for freelancers, micro-businesses and their accountants – explains what else you need to know about payments on account.
It’s easy to find out what you owe
If you haven’t received a letter and you’re unsure how much you owe, you can find out by logging into your HMRC online account and viewing your Self Assessment statement. Select ‘view statements’ to see how much you’ve already paid on account and how much you need to pay by 31 July.
The total relates to your previous year’s tax and class 4 NI bill
The amount you have to pay for this payment on account is half of your previous year’s tax and class 4 NI bill. So if your tax bill for 2016/17 was £1,500, then each payment on account you’d need to make in respect of your 2017/18 tax bill would be £750.
You’ve got until 31 July to pay
The deadline for payments on account to reach HMRC is 31 July. Different payment methods take different amounts of time to reach HMRC, so don’t get caught out.
|Payment type||How long it takes for the payment to reach HMRC||How you can pay|
|Online or telephone banking (Faster Payments)||Same or next day||By using the bank details listed on gov.uk|
|CHAPS||Same or next day||By using the bank details listed on gov.uk|
|Bacs||Three working days||By using the bank details listed on gov.uk|
|Debit card online||Same or next day||Online via gov.uk|
|Credit card online||Same or next day||Online via gov.uk. A non-refundable fee applies if you pay by credit card.|
|Cheque through the post||Three working days||By writing a cheque made payable to ‘HM Revenue and Customs only’ followed by your Unique Taxpayer Reference (UTR) number. It should be posted along with your paying-in slip to HMRC, Direct, BX5 5BD – no street name, city name or PO Box is required.|
|Existing Direct Debit||Three working days||By setting up a Direct Debit from your HMRC online account. (Note that you have to set up a new direct debit every time you wish to make a payment).|
|New Direct Debit||Five working days||By setting up a Direct Debit from your HMRC online account.|
|At the Post Office (only an option if you get paper statements from HMRC and have a paying-in slip which they sent you).||Same day (Monday-Friday only)||By paying a maximum of £10,000 by debit card or cash. Some branches will let you pay by cheque made payable to ‘Post Office Ltd’. You need a paying-in slip from HMRC to pay at a bank, building society or Post Office.|
|At your bank or building society (only an option if you still get paper statements from HMRC and have the paying-in slip they sent to you in the post)||Same day (Monday-Friday only)||By paying cash or writing a cheque made payable to ‘HM Revenue and Customs only’ followed by your Unique Taxpayer Reference (UTR) followed by the letter ‘K’. You need a paying-in slip from HMRC to pay at a bank, building society or Post Office.|
You can apply to reduce your payments on account
If you know your tax and class 4 NI bill will be lower next year – for example if you’ve lost a big customer or you pass State Pension age and no longer have to pay class 4 NI – then you can apply to reduce your payments on account. However, be careful when doing this: if you reduce your payments on account too far, HMRC will treat it as unpaid tax and will charge you interest, so do leave a margin for error when you work out the reduction.