Payments on account are advance payments towards your tax and, where relevant, your Class 4 National Insurance bill. You may need to make them if you are self-employed or if you are a landlord. You may also need to make them if you operate your business through a personal or family company and extract the bulk of your profits in the form of dividends.
You will need to make payments on account of your 2021/22 tax liability if your self-assessment tax bill for 2020/21 was at least £1,000, unless at least 80% of the tax that you pay is collected at source, for example, under PAYE. Two payments on account are made for each tax year.
Each payment on account is 50% of your income tax and Class 4 National Insurance liability for the previous tax year. You do not need to take into account Class 2 National Insurance when working out your payments on account. If, for example, your 2020/21 income tax and Class 4 National Insurance liability was £3,000, you will make two payments on account of your 2021/22 liability of £1,500 each.
Payments on account are payable on 31 January in the tax year and 31 July after the end of the tax year, with any balance being due by 31 January after the end of the tax year. This means that if you are liable to make payments on account for 2021/22, you must make the first payment by 31 January 2022 (along with any remaining 2020/21 tax and Class 4 National Insurance, and your Class 2 National Insurance for 2020/21). The second payment on account must be made by 31 July 2022. If there is any remaining balance to pay, this is due, together with your Class 2 National Insurance for 2021/22, by 31 January 2023 (along with the first payment on account for 2022/23).
If your final liability for 2021/22 is less than you have paid on account, the excess can be set against your 2022/23 liability, or refunded.
If you think your tax liability for 2021/22 will be less than in 2020/21, for example, because you have lost business following the COVID-19 pandemic, you can elect to reduce your payments on account. This can be done online through your self-assessment tax account, in your tax return or by post. However, if you reduce the payments below the eventual liability, interest will be charged on the amount underpaid.
If you are unsure whether you need to make payments on account of your 2021/22 tax liability or are unsure how to calculate them, we can help.