Income tax for the tax year ended 5 April 2011 is due by 31 January 2011. Hopefully you have already filed your self assessment tax return and know exactly what you owe. However some people will have an unpleasant surprise - in addition to owing tax for the year ended 5 April 2011, they could also owe “payments on account”.
So what are “payments on account” (POA), and how do they work?
POA are a payment towards your tax liability for the next tax year, so for the tax year ending 5 April 2012. If you are asked to make payments on account, they will fall due on 31 January, and on 31 July. By the time you get to the next payment deadline of 31 January 2013, you will in theory already have paid a significant portion of the tax due.
How do they work?
The POA are based on the current year tax liability – so the assumption is that you will have to pay the same tax next year as this year. They are then spread over the two payment dates, so 50% is due on 31 January, and the remaining 50% is due on 31 July.
Its easiest to look at through an example. Jane has filed her first self assessment tax return for the tax year ended 5 April 2011. Her tax liability for the 2010-2011 tax year was £3,000. Her POA towards her 2011-2012 tax liability will be two payments, each of 50% – or £1,500.
Tax due on 31 January 2012:
£3,000 (2010-2011 tax liability)
£1,500 (2011-2012 first POA)
Tax due on 31 July 2012
£1,500 (2011-2012 second POA)
She then files her 2011-2012 self assessment tax return, and has a tax liability of £3,500. She has already paid a total of £3,000 through the POA, so will only owe the balance of £500 on 31 January 2013. In addition she will also have to pay POA for 2012-2013 of 50% of £3,500 = £1,750.
The threshold for POA is £1,000 - so if your tax liability for 2010-2011 is £999 you won’t have to make POA for 2011-2012, but if your tax liability for 2010-2011 is £1,000 then your total payment due on 31 January jumps up to £1,500.
What to do if your POA are too high?
If your taxable income is going down, and therefore you expect that your tax liability will be lower than the year before, you can apply to have your POA reduced. Be careful though – if you reduce your POA below your eventual tax liability, you would get charged interest on any underpayment.
Reducing your POA is an easy thing to do. You can either complete a form, or apply to reduce your payments on account when you are logged in to the self assessment online services – or ask your accountant to do it for you.