Tax Payments On Account

The Tax and National Insurance and Payments On Account system will apply to most healthcare practitioners either after the first year or second year in business.

 

Our guide to the HMRC Tax Payments On Account system.

Income Tax, Class 4 NI, Class 2 NI and Student Loan repayments must be paid in full to HMRC by 31st January each year for the previous tax year.

For example: for Tax Year 2017/18, (6th April 2017 to 5th April 2018) Income Tax, Class 4 NI, Class 2 NI and Student Loan repayments should be payable in full by 31st January 2019.

So for many small businesses, there is a delay of nearly 10 months after the tax year has ended, which leaves plenty of time to set the money aside.

But, when the Income Tax & Class 4 NI calculation is greater than £1,000, for a tax year, this triggers HMRC’s Payment On Account requirement, so you no longer have the benefit of the 10 months’ delay.

Payments On Account should be paid in the January of the tax year itself and then the following July (ie. 6 months later). As the Payments On Account are basically estimates, any final amount payable should be paid by the 31st January following the tax year end.

So, Payments On Account are in the two equal instalments:
• 31st January
• 31st July
• any balance of Income Tax & Class 4 NI still owing (after the Self Assessment has been filed) has to be paid by the following 31st January as usual, and also Class 2 NI and Student Loan repayments.

For example, the Income Tax and Class 4 NI Payment On Account dates for the 2017/18 tax year (6th April 2017 to 5th April 2018) are:
31st January 2018
31st July 2018
• any balance of Income Tax and Class 4 NI still owing (after the Self Assessment has been filed), plus Class 2 NI and Student Loan repayments, have to be paid by 31st January 2019.

 

How the Payments On Account are calculated

The January and July Payments on Account are calculated at 50% each, of the Income Tax and Class 4 NI due for the previous year.

Example:
For 2017/18, if you have a Tax and Class 4 NI calculation of £1,500, which is payable by 31/1/2019, and this is the first time that your Income Tax and Class 4 NI has been over £1,000, then Payments On Account must start for the following year 2018/19.

In addition to the £1,500 for 2017/18 which must be paid by 31/1/2019, you must also pay Payments On Account for 2018/19 as follows:

31st January 2019 £750
31st July 2019 £750
• any balance of Income Tax & Class 4 NI still owing for 2018/19, plus Class 2 NI and any Student Loan repayments have to be paid by 31st January 2020.

Total payments would be:

31st January 2019 £1,500 + £750 = £2,250 (plus Class 2 NI and Student Loan repayments)
31st July 2019 £750

This is often a surprise for people of have just started out as being Self Employed. In the example above they would only be expecting to pay £1,500 on 31/1/2019, and now find that a total of £2,250 must be paid on 31/1/2019, and a further £750 on 31/7/2019. So that’s double the Income Tax & Class 4 NI over a 6 month period.

 

What happens for the next year with Payments On Account?

Continuing the above example, if for 2018/19, (6/4/18 to 5/4/19) the Income Tax and Class 4 NI is finally calulated as £1,800 based on the profit for that year, this is what happens:

• Total Tax & NI Calculation: £1,800
• Payments On Account already paid: £750 31/1/19 and £750 31/7/19 = £1,500
Balance payable 31/1/20: £300 (plus Class 2 NI and Student Loan repayment)

At the same time, HMRC calculates Payments On Account for 2019/20 at 50% of the 2018/19 Income Tax and Class 4 NI calculation, so 50% of £1,800:

31st January 2020 £900
31st July 2020 £900
• any balance of Income Tax & Class 4 NI still owing for 2019/20 (plus Class 2 NI and Student Loan repayment) has to be paid by 31st January 2021.

Total payments would be:

31st January 2020 £900 + £300 = £1,200 (plus Class 2 NI and Student Loan repayment)
31st July 2020 £900

This shows how the Payments On Account process is catching up with itself, and although the business is growing, there is a heavier tax burden in the first year that the Payment On Account system ‘kicks in’.

Compare:

31st January 2019 £1,500 + £750 = £2,250 (plus Class 2 NI and Student Loan repayments)
• 31st January 2020 £900 + £300 = £1,200 (plus Class 2 NI and Student Loan repayment)

 

Class 2 NI

Class 2 NI in one year is not taken into the calculation for Payments On Account for the following year.

 

Student Loan Repayments

Student loan repayments in one year are not taken into the calculation for Payments On Account for the following year.

 

 

HMRC Link:
Payments On Account