If you are a seasoned Self-Assessment taxpayer, you will be familiar with the cash flow challenges that come with paying your tax bills in just two instalments – one on 31 January and one on 31 July each year.

But, if you are new to Self-Assessment having previously paid Income Tax and National Insurance through PAYE, this can come as a shock.

And, this year, as we emerge from the pandemic, there are some particular challenges to contend with.

The two payments on account are calculated on the previous year’s tax bill and are designed to avoid building up debt to the taxman.

That means months of supressed or even non-existent trade during the lockdowns could mean your payments on account are far higher than they should be.

HMRC says that if you know your tax bill is going to be lower than last year, you can ask them to reduce your payments on account. You can do this either online or by post.

On the other hand, a ‘balancing payment’, may be required should your tax liability be greater than the previous year.

An example below can be found on the HM Revenue & Customs (HMRC) website together with information on payment methods.

Your bill for the 2019 to 2020 tax year is £3,000. You made two payments on account last year of £900 each (£1,800 in total). The total tax to pay by midnight on 31 January 2021 is £2,700. This includes:

  1. your ‘balancing payment’ of £1,200 for the 2019 to 2020 tax year (£3,000 minus £1,800)
  2. the first payment on account of £1,500 (half your 2019 to 2020 tax bill) towards your 2020 to 2021 tax bill
  3. You then make a second payment on account of £1,500 on 31 July 2021.

If your tax bill for the 2020 to 2021 tax year is more than £3,000 (the total of your two payments on account), you will need to make a ‘balancing payment’ by 31 January 2022.

Payments on account do not include anything you owe for capital gains or student loans (if you’re self-employed) ­– you’ll pay those in your ‘balancing payment’.

There are various ways to pay your bill including bank transfer, debit or credit card, direct debit and you can also pay by instalments.

HMRC has also said it is willing to be sympathetic to those who cannot pay their bill on time and will allow taxpayers to set up a payment plan.

For help and advice with this and related matters, please get in touch with our team today.